China’s National Bureau of Statistics will publish inflation data on Wednesday consisting of the consumer and producer price indices. While both the CPI and PPI rates are expected to moderate in March, investors will be wary of any unexpected weakness in price pressures in the world’s second largest economy amid an escalating trade spat with the United States.
The annual rate of CPI is forecast to ease by 0.3 percentage points to 2.6% in March, remaining below the People’s Bank of China’s (PBOC) target of around 3%. Inflation had jumped from 1.5% to 2.9% in February, mainly due to the effects of the Lunar New Year, which caused a one-off bump in food and travel costs. However, apart from the holiday distortion, there are few upside pressures on consumer prices on the horizon, especially as the economy is expected to slow this year, and inflation looks set to remain below the central bank’s target for a while longer. The 12-month CPI rate has been below 3% since late 2013.
The more closely watched item in tomorrow’s data will be producer prices, which are seen as a good indicator of demand for commodities and the profitability of China’s industrial sector. Factory inflation surged in late 2016/early 2017, fuelling the global reflation trade and alleviating deflationary pressures around the world. However, PPI is forecast to moderate for the fifth straight month in March to 3.2% year-on-year from 3.7%.
A bigger-than-expected fall in the PPI rate would raise concerns of weakening demand for Chinese imports of commodities and signal softer prices for Chinese manufactured goods exported to the rest of the world, boding negatively for global inflation. The Australian dollar is the most sensitive to any surprises in tomorrow’s inflation indicators as Australia is a major exporter of commodities to China.
Disappointing numbers could see the aussie re-testing recent support around the $0.7650 level and heading back towards its longer-term ascending trend line. However, stronger-than-expected readings could lift the aussie towards the $0.7780 resistance level.
The yuan could also see some volatility from the inflation data, having come into focus this week after a Bloomberg report said China was considering the possibility of a gradual depreciation of its currency to use as a tool in its trade stand-off with the US. The US dollar spiked to 6.3168 yuan in onshore trading from an earlier low of 6.2940 after the report emerged, but later fell back to close lower on the day. The yuan is even firmer today, last trading around 6.2920 per dollar, possibly on intervention by the PBOC to counter speculative trade.
A speech by China’s President Xi Jingping earlier on Tuesday also probably contributed to the yuan extending its gains. Speaking at the Boao Forum for Asia, President Xi promised to increase access for foreign investors to the Chinese market as well as lower import tariffs for key sectors such as automobiles. Xi also pledged to improve legislation on protecting ownership of intellectual property – a big cause of conflict with US President Trump. His proposals, while lacking much detail, calmed market fears of an imminent trade war between the US and China and raised hopes of a negotiated solution.
China looks set to remain in the headlines until the end of the week as March trade figures are released on Friday, which will include monthly export and import performance.
