The Opening Belle - China Inflation Dips Below Zero

China’s central bank is likely to look through the first deflation in consumer prices in over a decade, economists said, as it keeps its focus on bringing debt under control.

The fall was largely driven by a cyclical decline in a single commodity, pork, after supplies recovered from last year’s swine disease. As such, the inflation slump is seen as temporary and unlikely to deter the People’s Bank of China from its stated aim of gradually reducing the pace of credit growth in order to stabilize debt levels in the economy and prevent a rapid rise in house prices.

“The question for the markets is whether the PBOC might slow the policy neutralization process due to extremely low inflation,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “For now, it seems unlikely as the Chinese policy makers have already stepped up deleveraging measures and started the property tightening.”

Xing Zhaopeng, a markets economist at Australia & New Zealand Banking Group in Shanghai, said it’s unlikely that consumer deflation will persist, given “higher crude prices and the coming peak season of travel before the New Year.”

“Inflation will not be a restriction to monetary policy, as both CPI and PPI are expected to improve gradually on a month-on-month basis from now on,” he said.

China’s strong economic recovery will likely add to price pressures. Exports surged more than 20% last month, while the purchasing managers’ index reached a three-year high. That could push up the core inflation measure, which strips out the more volatile food and energy prices and has remained at 0.5% since July.

What Bloomberg Economics Says...

“The CPI deflation is likely to extend into early 2021. A key issue will be how the price trends affect activity more broadly. Factory-gate deflation has been a check on the recent pickup in industrial profits. Now, falling consumer prices could be another risk to earnings. For the People’s Bank of China, this would be a non-negligible consideration.”

-- David Qu, China economist

China’s factory gate prices fell at a slower pace in November, adding to signs that the world’s second-largest economy is rebounding from the COVID-19 pandemic, but consumer prices unexpectedly declined for the first time in over a decade.

The producer price index (PPI) fell 1.5% from a year earlier, the National Bureau of Statistics said on Tuesday. The drop was smaller than the 1.8% decline forecast in a Reuters poll and the 2.1% drop in October.

Month-on-month PPI rose in November at its fastest pace since the pandemic started in China late last year, on rising global crude oil prices. It rose 0.5% in November after no change in the previous month.

Raw material prices fell 4.2% from a year ago, at its slowest pace since February, after declining 6.0% in October.

“We believe as the economy stages a substantial year-on-year expansion in the first quarter next year, PPI may achieve growth with a high positive slope,” said Zhang Yi, Beijing-based chief economist at Zhonghai Shengrong Capital Management.

The Westpac-Melbourne Institute Index of Consumer Sentiment lifted by 4.1% to 112 in December from 107.7 in November.

The surge in the Index continues. It is now 48% above the low in April and has reached its highest level since October 2010 – marking a ten year high.

After only eight months the evidence seems clear that sentiment has fully recovered from the COVID recession.

The behaviour of the Index highlights the difference between this recession; the downturn during the Global Financial Crisis and the recession of the early 1990s.

These differences relate to the nature of the shocks; the resilience of the financial system; and the rapid, pro–active responses from authorities which have been critical to containing the economic damage.

Westpac’s revised unemployment forecasts indicate that the unemployment rate will return to close to its pre–COVID level in less than three years.

That result would compare extremely favourably with both the 1990s recession and the GFC, providing clear evidence that the government and RBA’s policy response, along with the different nature of this recession, have significantly limited the damage to the economy, particularly the labour market, compared to

those previous episodes.

Markets will be watching the RBA’s approach to its yield curve control policy.

By 2022, if the near term forecast is for the unemployment rate to be returning to near pre COVID levels, it will be difficult to justify forward guidance that the cash rate will remain on hold for a further three years.

The Trump administration has made a new fiscal stimulus offer worth $916bn to congressional Democrats, after a fraught day that raised fresh doubts about the prospects for a new relief package to spur the US economic recovery from the pandemic.

Steven Mnuchin, the US Treasury secretary, made the proposal on Tuesday to Nancy Pelosi, the Democratic speaker of the House of Representatives, saying he had reviewed it with Republican congressional leaders and President Donald Trump.

Mr Mnuchin’s offer signals that the Trump administration is now willing to engage in the talks and try to secure an agreement. But while the overall pricetag is close to a $908bn plan being crafted on Capitol Hill by a bipartisan group of moderate senators, the White House plan slashes funding for federal unemployment benefits from $180bn to $40bn and includes a $600 cheque per person.

In his statement, the Treasury secretary said the White House plan included funding for state and local governments and “robust” liability protections for businesses, which are two of the main sticking points in the negotiations.

The White House’s return to the stimulus fray came amid concerns that efforts in Congress to reach a bipartisan compromise — driven by a group of centrist senators from both parties — were hitting a brick wall as they struggled to find a solution to the thorniest issues.

But Ms Pelosi and Chuck Schumer, the top Democrat in the Senate, gave the White House proposal a very frosty reception, saying the reduction in money for jobless benefits was “unacceptable”.

“The president’s proposal must not be allowed to obstruct the bipartisan Congressional talks that are under way,” they said. “Members of the House and Senate have been engaged in good-faith negotiations and continue to make progress. The bipartisan talks are the best hope for a bipartisan solution”.

Earlier on Tuesday, Mitch McConnell, the Republican Senate majority leader, had proposed to take the most politically sensitive provisions out of the talks, but that offer was also rebuffed by Democrats.

Mr McConnell said he would be willing to drop Republican demands for protections to shield businesses, schools and other organisations from legal liability during the pandemic — an issue he previously described as a “red line” for the legislation — if Democrats were willing to drop their demand for immediate funding for state and local governments.

The two sides could then come back to the table and hammer out a broader deal when president-elect Joe Biden’s administration takes office next year, Mr McConnell suggested.

Hungary and Poland voiced optimism that a deal to unblock the European Union’s $2.2 trillion budget and stimulus plan is within reach, even as they reiterated demands that the bloc has already rejected.

The two countries have been discussing a political compromise that would clarify how a rule-of-law mechanism would be attached to the spending plan. They’ve threatened to veto the package over their opposition to funds being tied to democratic standards that have been at the heart of repeated clashes with Brussels.

Other EU leaders say they’ll cut the pair out of coronavirus-relief financing with a workaround if they don’t drop their opposition before a summit on Thursday. The two sides are “one centimeter” away from a deal, Hungarian Prime Minister Viktor Orban said in an interview with the Polsat broadcaster Tuesday during a visit to Warsaw, without elaborating.

“We have a good chance to close this whole issue this week during the summit,” Orban said. “We can reach an agreement which would be a great success.”

 I look forward to welcoming UK Prime Minister @BorisJohnson tomorrow evening.

We will continue our discussion on the Partnership Agreement.— Ursula von der Leyen (@vonderleyen) December 8, 2020