Deflation pressures ease in China as consumer prices decline

2023-09-09 08:25:45

Data in a week: European Central Bank meeting and US inflation in the lead

Important data and meetings will dominate the economic scene next week, from US inflation to the European Central Bank meeting to decide on interest rates. It is China that will be in the spotlight with many data releases including the consumer price index, loan growth, investment, retail sales and employment.

The US Consumer Price Index (inflation) report and retail sales data will be released on Wednesday. If US demand for goods does not weaken significantly and if inflation intensifies, interest rate hike expectations for the November meeting may become the consensus.

The inflation report may not be clear, as it is clear that headline inflation will rise due to higher gasoline prices, but core inflation, which excludes energy and food prices, may provide another weak reading.

The Fed’s next interest rate decision is scheduled for September 20.

Phil Blancato, CEO of Ladenburg Thalmann Asset Management, said: “I expect the CPI to come in higher than expected (with) the rise in the price of oil.”

Traders’ bets on interest rates remaining at current levels in September amounted to 95 percent, according to Archyde.com, and they priced close to 55 percent for a temporary pause in raising interest rates at the November meeting.

Mixed comments from Federal Reserve officials added to the uncertainty. New York Fed President John Williams kept his options open, while Dallas Fed President Lori Logan said that while it “may be appropriate” to keep interest rates steady at the next meeting, further tightening may be needed.

Investors will also pay close attention to the University of Michigan’s inflation forecast on Friday.

Euro-zone

The European Central Bank begins its round of meetings on Thursday. After last week’s mixed inflation numbers (the headline number remained unchanged, but core inflation fell), few economists believe the central bank’s work is done. But they are divided on whether the additional rise will come now or later in the year.

According to a majority of economists polled by Archyde.com, the European Central Bank will keep interest rates steady on September 14, but just under half expect another rise this year to reduce inflation.

With economic activity in the 20-member bloc slowing under the weight of cumulative increases of 425 basis points since July 2022, investors are now betting that it is time for the central bank to break the streak of nine consecutive hikes.

But with inflation at 5.3 per cent in August, well above the European Central Bank’s 2 per cent target, and underlying price pressures falling only slightly, policymakers have reiterated that a further increase is likely.

While the majority of economists, 39 out of 69, in the September 5-7 poll expected no change in the deposit rate on Thursday, 30 of them said the ECB Governing Council would raise it by a quarter point to 4.00 percent.

If achieved, this would raise the deposit rate to its highest level since its inception in 1999.

Bank of America Global Research said on Friday that it expects the European Central Bank to raise all three interest rates by 25 basis points at its meeting in September, citing weaker growth expectations and a lack of clear evidence of peak core inflation.

“If the September inflation release challenges our view of lower inflation, we will likely postpone our call for the first cut,” economists at Bank of America Global Research said.

United kingdom

It is likely to be an important week for the UK before the next monetary policy meeting on September 21.

Bank of England Governor Andrew Bailey said two days ago that the United Kingdom was “much closer” to the peak level of interest rates, but warned that inflation might rise once more in August due to the impact of fuel prices.

Bailey told a group of lawmakers during a Treasury Committee session that there was no longer a clear upward path for interest rates, which stand at 5.25 percent.

Some economists believe interest rates will rise to 5.5 percent this month as pressure continues on the bank to control inflation.

“There was a period when it seemed clear to me that rates needed to rise in the future and the question for us was by how much,” Bailey said. And on what time frame?

Key releases from the UK include July GDP growth and employment figures. While growth in the UK was better than the eurozone, it stalled in July, pre-empting the weaker output figure at the start of the third quarter.

China

Following the release of much-desired consumer and producer inflation data for August on Saturday that showed deflationary pressures easing with consumer prices falling and the producer index continuing its decline, there are some signs of optimism that the last eight months of deflationary pressures may be beginning to ease.

Other key data to focus on will be the new yuan loans and cash block for August which will be released on Monday. It will provide concrete data on whether the Chinese economy is slipping into a liquidity trap despite the current targeted monetary and fiscal stimulus measures enacted by policymakers.

Finally, the housing price index, industrial production, retail sales and unemployment rate for August will be released on Friday with a slight improvement in retail sales and industrial production expected; 2.8 percent on an annual basis for retail sales, more than the 2.5 percent on an annual basis recorded in July, and 4 percent on an annual basis for industrial production compared to 3.7 percent in July.

Market participants will be closely monitoring youth unemployment for August following the July figure was temporarily suspended by the National Bureau of Statistics without any clear timeline for suspension.

China’s youth unemployment data is a major concern following the youth unemployment rate rose to a record high of 21.3 percent in June, regarding four times the national unemployment rate of 5.3 percent.

Finally, China’s central bank, the People’s Bank of China, will announce its decision on its key interest rate, the one-day medium-term lending rate, on Friday, and expectations are for no change at 2.50 percent following an advance cut of 15 basis points.

Russia

The central bank is expected to leave its key interest rate unchanged at 12 percent on Friday, which had risen sharply at the last meeting (from 8.5 percent).

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