Daily Points

ON DECK FOR MONDAY, SEPTEMBER 9

KEY POINTS:

• Markets shake off Friday’s post-payrolls reaction
• Chinese core prices are falling
• Surveying the evidence on Chinese deflation…
• ...and how the Fed might wake up the PBOC…
• ...as US election risk looms large

As a reminder, please see the Global Week Ahead—What You Thought You Knew About Canadian Consumers Is All Wrong (here). Key topics include:

• Canadian consumers could pose tsunami risk to the economy
• US CPI: will core services inflation be rejuvenated?
• ECB to cut, adjust policy rate bands
• BoC’s Macklem to speak on trade post jobs
• Peru’s central bank expected to cut again
• Russia’s central bank may hike again on wartime inflation
• Harris versus Trump round 1
• Other global indicators to focus on China, UK jobs

It’s a really light morning with nothing much of consequence by way of macro developments. Stocks are rebounding somewhat across N.A. futures and European cash markets with only Asian exchanges in the red as they catch up to Friday’s developments since they were shut when nonfarm landed. Sovereign bonds are mildly cheaper across most global benchmarks. The dollar is firmer except versus CAD and MXN. Oil prices are up by about 1%.

CHINESE CORE CPI FALLS AGAIN

China’s CPI inflation landed at 0.6% y/y (0.5% prior, 0.7% consensus) with core at 0.3% y/y. That remains very soft. August was an outlier in terms of seasonally unadjusted core CPI compared to like months of August in the past (chart 1) and core CPI m/m at a seasonally adjusted and annualized pace is trending lower (chart 2). 

But is it deflation? That’s more complex than merely pointing to the price changes at the margin. Deflation is a sustained, economy-wide decline in a broad set of prices that is expected to continue and that fundamentally alters behaviour such as toward postponing consumer spending and business investment into future periods when prices are expected to be lower. It can be very difficult to arrest which was the problem in the 1930s.

We can look at expectations using a couple of sources. One is the PBOC’s urban depositors survey that includes several measures including expectations for prices and house prices (chart 3 and here). The price expectation index increased in 2024Q2 with 23.5% of respondents saying they expect higher prices next quarter, 54.5% expecting little change and 9.4% expecting lower prices with about 13% unsure. The overall expected price index has been softening along a very long-term trend since the aftermath of the GFC. No real deflation expectations there, but surveys of consumer attitudes are not necessarily reliable and perhaps more so in China’s system!

What about forecasters? Bloomberg consensus shows that forecasters expect prices to rise by 1.5% y/y next year and 1.9% in 2026. No deflation there either, but let’s just say that forecasters have been known to make mistakes!

On house prices, the same PBOC survey shows 11% expect higher prices, 52% expect little change, and 23% expect a drop with about 14% unsure about the next quarter.

And yet, new house prices are down by about 5.3% y/y and existing home prices are down 8.2% y/y (chart 4).

Equity prices are in a tailspin. The Shanghai composite that is skewed more toward SOEs is down by 26% since the late 2021 peak. The Shenzhen composite is down by over 40%. Chart 5.

The yuan exchange rate to the USD has slightly appreciated since late July and has been managed through fixings to largely move sideways this year. There won’t be much help offered to prices from exchange rate movements to date.

Inventories remain high in China’s economy as it over-produces partly given its global ambitions, partly because over-producing provides some short-term support to the economy absent greater policy easing that I’ll come back to, and partly through overt mismanagement (chart 6). Higher inventories make for a tougher pricing environment. 

Could all of this change in future? Perhaps. With the Fed embarking upon an easing path, the PBOC may have relatively less worry about easing to address the fact that it is blowing its 3% inflation target that it rarely hits anyway. That’s because the currency may be less vulnerable to Chinese policy easing if the Fed is also easing which lessens related financial stability concerns.

On that note, China has enormous untapped room for applying stimulus but it needs to match more action to recent rhetoric. It is among the rare number of major global central banks that have not embraced quantitative easing if needed. It has ample room to lower its key policy rates amidst confusion surrounding another shift in its preferred policy rates, and to inject liquidity. M1 money supply is falling by 6.6% y/y for the biggest contraction in decades, while M2 is growing by only 6.3% y/y for its slowest rate in decades (chart 7). There remains room to reduce required reserve ratios and free up bank capital. 

Of course, much of the world is pushing back with protectionist measures against China’s over producing and global ambitions. If Trump gets elected and imposes a big tariff risk then China faces bigger problems yet, but so will the US and everyone else.

LIGHT N.A. CALENDAR

The N.A. calendar is very light. Mexican CPI for August was flat in m/m erms and landed at 5% y/y, close to expectations because Mexico releases CPI on a bi-weekly basis. Core CPI landed on the screws at 4% y/y.

The NY Fed’s 1-year inflation expectations measure for August arrives at 11amET. At about 3%, it has been moving sideways this year after decelerating from a peak of 6.8% in mid-2022.