China and US CPI and PPI: Is it transitory?
Joe Perry May 11, 2021 10:35 PM
This week’s CPI and PPI out of the US will give traders a better idea of where inflation is headed
China released both CPI and PPI data earlier and the results point to worries that inflation may pick up faster than expected. China’s YoY CPI print was 0.9% vs 0.4% in March. This is the highest reading since September 2020. This big gainer in the CPI data was transportation and communication, which was 4.9% vs 2.7% in March. Pork prices continued to decline, -21.4% vs -18.4% last. The MoM headline reading was -0.3% vs -0.5% in March.
But what was more interesting was PPI
PPI is a measure of producer prices. It tells what businesses are paying for materials they use to make their products. In theory, these prices will be passed on to the consumer at some point in the future. China’s YoY PPI for April was 6.8% vs 6.5% in March and only 4.4% expected! This is the highest reading since October 2017! Think about how much commodities, such as lumber and iron ore, have gone up over the last month. The big question is “When will these price increases show up in the CPI data?”.
Now it’s time for the US release
On Wednesday, the US will release April data for CPI and on Thursday, for PPI. Expectations for CPI are 3.6% YoY for the headline print and 2.3% YoY for the Core Inflation Rate. PPI is expected to be 5.9% YoY for April.
Should the Fed be worried?
The Fed has indicated that after years of inflation below their target of 2%, they are willing to let inflation “run hot” for a period of time. However, if the headline result is as expected, inflation will be significantly above the Fed’s 2% target. One has to consider that if the PPI data is as expected, it will feed through to the consumer and the CPI. Does it matter? Probably not. The Fed has already indicated that they believe the current inflation is “transitory”. They need a “string of months” of actual data before they determine that inflation is too hot (whatever “too hot” is considered). If the US data is “as expected”, PPI in two of the largest economies in the world will be 6.8% and 5.9%, which is primary due commodities and raw materials. Even if the inflation is transitory, how long can central banks allow inflation to “run hot” until they begin tightening rates?
On a daily timeframe, USD/CNH had been moving in a downward sloping channel since May 2020 before a 1 ½ month correction in February and March of this year. The pair began moving lower through April and tested the February lows yesterday near 6.4000.
Source Tradingview, City Index
On a 240-minute timeframe, USD/CNH formed a hammer candlestick the at bottom with the RSI below 20, indicating a possible reversal. Prices did bounce, however so far, USD/CNH can’t even reach the 38.2% Fibonacci retracement from the May 5th highs to the yesterday’s lows near 6.4378. Resistance above is at the 38.2%. 50%, and 61.8% Fibonacci retracement levels from the same timeframe at 6.4379, 6.4483, and 6.4587, respectively. There is also horizontal resistance slightly above the 61.8% Fib retracement at 6.4603. Support is a yesterday’s lows near 6.4039, just ahead of the February 15th lows at 6.4007.
Source Tradingview, City Index
In addition, on a weekly timeframe (not shown), there is horizonal support below at 6.3825, dating back to May 2018.
This week’s CPI and PPI out of the US will give traders a better idea of where inflation is headed. Will the data be transitory or not? Is it hot, or too hot? These are the questions traders will be asking themselves over the next few months!
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.