Chinese Inflation Misses Expectations

Chinese inflation missed expectations this morning, with CPI hitting 0.6% on an annualised basis for the month of August against a consensus which was pointing to a 0.7% print. On a monthly basis, prices rose 0.4%, a marginal fall from the 0.5% print recorded last month.

While the benchmark inflation indexes came in softer-than-expected, annualised CPI nonetheless rose at its strongest rate since February.

This came as food prices rose for the first time in well over a year, with prices rising 2.8% from August 2023.

While CPI came in positive, China’s Producer Price Index came in negative, falling one percentage point to -1.8% on an annualised basis.

This morning’s inflationary CPI print follows the PBoC’s decision to leave their interest rates unchanged at the back end of last month. Here, the central bank maintained its 1-year loan prime rate, keeping it at a record low of 3.35%, following their decision to cut rates 10bps in July.

This comes as Beijing tries to keep monetary conditions loose in an attempt to stimulate growth across the economy.

The central bank continues to grapple with an economy facing headwinds in the form of a downturn in consumption, fragility in local government debt and a precarious property sector. An increasingly tempestuous relationship between Washington and Beijing has also got many concerned over the extent to which this could impact transpacific trade between the two economic powerhouses.

The latest quarterly growth figures in China suggest that the world’s second largest economy grew just 0.7% over Q2.

Japanese GDP came in marginally softer-than-expected this morning, despite being the strongest quarterly output in a year. Against forecasts of 0.8%, output across the world’s fourth largest economy grew 0.7% over the second quarter of the year. This was a sizeable increase from Q1’s contractionary print of 0.6%, and also marks a rise in output from Q3 and Q4’s figure of -1.1% and 0.1%, respectively.

On an annualised basis, GDP grew at 2.9%, again missing expectations of 3.2%.

The rise in output from Q1 follows an increase in spring wages in addition to an uptick in output across Japan’s automotive sector. That said, with capital expenditure and private consumption easing, policy makers will be keeping a keeping a close eye on the extent to which the central bank’s monetary tightening is impacting growth.

In July, the Bank of Japan raised their benchmark interest rate from 0-0.1%, to 0.25%, with expectations that a further hike could come in the coming months.

This week markets will be keeping a close eye on US CPI on Wednesday as markets gear up for the FOMC on 18 September. Markets are forecasting CPI to rose 0.2% on a monthly basis, against a rise of 2.6% on an annual basis. Looking ahead to the FOMC, a 25bps rate cut has been fully priced in with markets also implying around a 45% chance of a 50bps cut. This follows forward guidance from Chair Powell at the Jackson Hole Economic Symposium, where he telegraphed that “the time has come for policy to adjust”.

On Thursday, attention will turn to the ECB’s interest rate decision. Following the ECB’s July cut (which eased rates from record highs after nine consecutive months), and their subsequent hold in August, it is widely expected that Frankfurt will cut 25bps on the 12th.