CICC: Core CPI and PPI Slow Down, Bond Bull Market Continues

Event

China's CPI in August rose by 0.6% year-on-year, lower than the expected increase of 0.7% and higher than the previous increase of 0.5%.

China's PPI in August fell by 1.8% year-on-year, lower than the expected decrease of 1.4% and lower than the previous decrease of 0.8%.

(Expectations refer to Wind's consistent expectations, the same below)

Comments

In August, the PPI decreased by 0.7% month-on-month, with the PPI year-on-year dropping from -0.8% last month to -1.8%, indicating a significant decline in industrial prices. With downstream demand remaining weak in August and relatively flat macro policy expectations, the market lacked momentum from the peak trading season expectations. Against a backdrop of weak reality and weak expectations, industrial prices continued to decline. The decline in market prices in July was reflected in the lagging factory prices at the enterprise end, resulting in a significant month-on-month and year-on-year decline in industrial prices in August. The CPI in August rose by 0.4% month-on-month, with the CPI year-on-year increasing from 0.5% last month to 0.6%. The rise in food prices helped stabilize consumer prices slightly. In August, vegetable prices rose significantly, pork prices also rose noticeably, and fresh fruits and eggs also saw increases, with food prices rising by 3.4% month-on-month. Core inflation remained weak in August, slowing to 0.3% year-on-year. Coupled with a significant drop in vehicle fuel prices, non-food prices in August decreased by 0.3% month-on-month, with non-food prices year-on-year dropping from 0.7% last month to 0.2%, resulting in August CPI being lower than market expectations year-on-year.

Looking ahead, in terms of PPI, with relatively weak expectations for the traditional peak season of September and October and high industrial inventories, industrial prices may continue to be under pressure. We preliminarily estimate that the year-on-year PPI in September may drop to around -2.6%; in terms of CPI, although the impact of high temperatures is weakening and food prices may fall from their highs, with the backdrop of slowing growth in household income, core inflation may continue to be weak. We preliminarily estimate that the year-on-year CPI in September may drop to around 0.4%.

Driven by the rise in food prices, the overall year-on-year CPI in July and August showed a slight increase. However, it is worth noting that core inflation remains weak, with non-food CPI dropping from 0.8% in June to 0.2% in August. Consumer inflation in China has not truly stabilized. Although nominal interest rates in China are relatively low, low inflation still results in relatively high real interest rates. This is not only unfavorable for releasing consumer demand but may also suppress corporate investment willingness. Against the backdrop of monetary policy focusing more on promoting a moderate inflation rebound, we believe that the central bank may continue to guide nominal interest rates downward.

Recently, the market has been paying close attention to the central bank's buying and selling of government bonds in August. We believe two points are crucial: first, in the context of relatively high MLF rates, the central bank may inject medium-term liquidity by buying short-term government bonds; second, selling long-term government bonds may affect the pace of yield changes but will not change the medium-term direction of yields. With current domestic nominal economic growth being low, long-term bond yields are still trending downwards. The current term spread is relatively high, which we believe does not reflect an optimistic market outlook for future fundamentals but is mainly influenced by loose liquidity and regulatory policies. Considering that the central bank is improving the monetary policy framework, future fund rates and even short-term rate volatility may decrease The currently high term interest rate differential provides good protection for the long end, and even if there are disturbances in supply and policy stimulus in the fourth quarter, the space for adjusting long-term interest rates may be limited. We continue to be optimistic about the domestic bond market and recommend continuing to focus on the value of long-term interest rate bond allocation.

1. Rising food prices drive a slight increase in CPI year-on-year, while core inflation continues to weaken

In August, CPI rose slightly to 0.6% year-on-year mainly driven by food inflation, while non-food and core inflation weakened further on a month-on-month basis, with year-on-year growth rates of 0.2% and 0.3% respectively. As August nears the end of the summer vacation, service CPI also slightly fell to 0.5% year-on-year, with the overall weak domestic demand trend continuing.

Looking at the breakdown, in August, weather factors continued to push up vegetable prices, coupled with a slight increase in pork prices, collectively pushing food inflation further up to 2.8% year-on-year. From a month-on-month perspective, vegetable prices increased by 18.1%, showing the largest increase. Other major sub-items all weakened marginally year-on-year, with housing remaining flat year-on-year mainly affected by the negative impact of rent, and from a month-on-month perspective, the peak season effect of renting weakened, with rent increases remaining stable; in the transportation category, car prices continued to decline, oil prices turned negative year-on-year, leading to a significant decrease in transportation and communication inflation year-on-year; clothing, household goods and services showed flat year-on-year performance, with negative growth on a month-on-month basis; as the summer vacation heat subsided, the growth rate of the education and entertainment sub-items fell year-on-year.

Overall, in August, only the food category showed resilience in prices due to supply-side factors, providing some support for CPI year-on-year, while other sub-items all experienced a certain degree of decline year-on-year, indicating that domestic demand still requires the support of relevant consumption policies to boost it.

2. Industrial prices significantly fell under the backdrop of weak reality and weak expectations

In August, PPI fell by 0.7% month-on-month, with PPI year-on-year dropping from -0.8% last month to -1.8%, indicating a significant decline in industrial prices; downstream demand remained weak in August, while macro policy expectations were relatively subdued, lacking the momentum of market trading season expectations. Against the backdrop of weak reality and weak expectations, industrial prices continued to decline, coupled with the lagged reflection of the market price decline in July on the ex-factory prices at the enterprise end, resulting in a significant decline in both month-on-month and year-on-year industrial prices in August.

Looking at different industries, in the non-ferrous sector, the market's expectation of a Fed rate cut in August strengthened, leading to a slight rebound in non-ferrous prices from a low level. However, due to the significant decline in non-ferrous prices in July, the ex-factory average price of non-ferrous metals still fell month-on-month in August; in the ferrous sector, despite the decline in steel mill profits and some production cuts in August, there was still no significant improvement in demand, coupled with insufficient market expectations for the upcoming peak season, steel prices continued to decline overall, with a significant decrease in black metallurgy and processing industry prices month-on-month; In terms of glass, in August, the reduction of production capacity of glass raw material enterprises was limited, downstream processing plant orders continued to decline, the glass market continued to be oversupplied, glass inventory continued to accumulate, and prices continued to decline; in the petrochemical sector, international crude oil prices continued to decline in August, coupled with the lagged effect of the July crude oil price decline, the month-on-month decline in oil extraction and processing factory prices in August was significant.

Looking ahead, the market's expectations for the traditional peak season of September and October are relatively weak. Against the backdrop of high industrial inventories, industrial prices may continue to be under pressure. We preliminarily estimate that the year-on-year Producer Price Index (PPI) in September may drop to around -2.6%.

Authors of this article: Geng Anqi S0080523060003, Fan Yangyang S0080521070009, Chen Jianheng S0080511030011, Article Source: CICC Fixed Income Research, Original Title: "Slowing Core CPI and PPI, Bond Bulls Continue - Analysis of August Inflation Data"