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China in deep deflation, need of monetary easing

(ATF) China’s first-quarter Monetary Policy Report (MPR), released Sunday, detailed recent and raised expectations of near-term future easing of monetary policy.

Today’s release of consumer- and producer-price numbers for April provided a darn good reason for action without delay. The Producer Price Index (PPI) dropped to a four-year low of -3.1% year-on-year and registered it’s steepest monthly decline since the 2008 financial crisis.

Meanwhile, the Consumer Price Index (CPI) fell to 3.3% in April from 4.3% in March and below market consensus of 3.7%.

Thus, inflation is no worry, but deflation is serious as it kills profits and investment and exerts upward pressure on the Chinese currency, hardly what’s needed when export orders are well down.

Bottom line: No better time than now for the People’s Bank of China (PBoC) to implement the MPR promise of decisive further policy easing.

The yuan rate was not immediately affected by the PPI plunge. The PBoC had set morning parity at a weak 7.0919. There had been a bit of yuan strengthening, to 7.0894 by 5pm HK time, but the amount was negligible. For traders, PBoC watch is the order of the day as any rates decision will dominate up or down yuan impulses from stock market signals.

The US dollar is down marginally in Asia; the DXY stood at 100.1570 at 5pm. But, of course, anything above 100 points to dollar strength. US stock futures are mixed, EU stocks are up a tad. For lack of other signals, we expect the USD to range trade.


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