Repairing the starting point of the balance sheet

Abstract

1. In September, the year-on-year growth rate of CPI was +0.4% (market expectation +0.6%), with a month-on-month change of +0.0%; the year-on-year growth rate of PPI was -2.8% (market expectation -2.5%), with a month-on-month change of -0.6%. The inflation reading has declined, but we believe that a temporary bottom has appeared, and the subsequent inflation has shown a significant upward elasticity. The policy "spring breeze" has arrived, effectively consolidating the foundation for a moderate inflation rebound.

On one hand, monetary and fiscal policies are working together to accelerate the repair of private sector balance sheets from the liability side (reducing mortgage rates for existing homes), asset side (introducing two targeted tools for the stock market, continued relaxation of real estate purchase restrictions, fiscal support measures for digesting existing housing stock), and income side (increasing fiscal support for people's livelihoods).

On the other hand, high-frequency data shows that a package of incremental policies has already been effective in promoting economic stabilization and recovery, effectively consolidating the foundation for a moderate inflation rebound.

2. CPI: Expected recovery is expected to offset core inflation risks.

In September, with the disturbance of weather factors eliminated, the momentum of various food prices has returned to seasonal levels. The momentum of beef and mutton prices has rebounded, but due to sufficient supply, the increase is limited; the momentum of pork prices has significantly narrowed, indicating a temporary peak with limited room for further increase.

In transportation and communication, the previous international oil price decline led to a month-on-month decrease in fuel for transportation by -2.8% (previously -2.9%); the internal price reduction trend in the automotive industry has eased, coupled with the start of the peak sales season, leading to a moderation in price declines by -0.1% month-on-month (previously -0.3%); communication device prices have slightly narrowed their decline by -0.6%.

Regarding core CPI, in September, core CPI decreased by -0.1% month-on-month, and year-on-year decreased to 0.1%. However, after the introduction of a package of policies at the end of September, the National Day travel performance was hot, with cross-regional personnel flows achieving a "jump" (from a 16% increase to 23% compared to the same period in 2019), and per capita tourism consumption exceeding the same period in 2019, reflecting the expected boost and wealth growth effects of the policies.

3. PPI: Incremental policies help repair the black chain.

In September, PPI decreased by -2.8% year-on-year (market expectation -2.5%), with a month-on-month decrease of -0.6%, narrowing the month-on-month decline. Overall, the upstream mining and raw material industries experienced larger declines, weakening the cost squeeze effect on downstream processing industries, leading to a more balanced distribution of corporate profits across industries. In terms of seasonal changes, the continued decline in prices in high-energy-consuming industries remains the main reason for the decline in PPI momentum.

In September, recession trading sentiment dissipated, major global central banks successively lowered interest rates to strengthen expectations of a soft landing, and bulk commodities sensitive to the economic cycle (such as copper, zinc) began to rise, with oil also rebounding in the second half of the month. After the introduction of a package of policies at the end of September, domestic black commodity prices quickly heated up, with monetary and fiscal policies working together to resolve risks, boost expectations, and stimulate momentum, paving the way for related domestic demand products to enter a recovery phase. 4. This inflation data is the first economic data released after the introduction of the "comprehensive incremental policy". However, the overall picture still reflects the economic situation before the policy was implemented, with a intertwining of insufficient domestic demand and private sector deleveraging. This is mainly reflected in both core CPI and PPI being at historical lows on a month-on-month basis, and core CPI approaching a year-on-year negative turn.

Therefore, the timing of the introduction of this round of policy measures is quite timely, directly targeting the core issues of the current economy. By using a combination of fiscal (central deleveraging) and monetary (debt reduction + credit injection) measures, the private sector and local government balance sheets are systematically repaired, thereby preventing the economy from falling into a "debt-deflation" spiral.

Looking ahead, in the next phase, the restoration of confidence among microeconomic entities and the gradual easing of debt burdens are of significant importance for stabilizing domestic demand. It can be said that we have taken an important step towards repairing balance sheets.

1. Risk Warning: Pressure still exists at the tail end of the real estate sector, and the momentum of consumption recovery is below expectations.

Author: Wang Hao (S0880521120002), Article Source: Guojun Macro Research, Original Title: "Starting Point for Repairing Balance Sheets - Review of September 2024 Inflation Data" by Guojun Macro