China: PPI deflation set to end this year- Danske

According to analysts from Danske Bank, the producer price index (PPI) in China will rise gradually and expect deflation to end this year.

Key Quotes:

“The most interesting part of today’s price data was the upward surprise to producer price inflation (PPI). PPI inflation increased more than expected to -4.3% y/y in March from -4.9% y/y in February. Consensus was for a rise to -4.6% y/y. While still in deflation territory the trend is now up as it hovered just around -6% in late 2015.

“We expect PPI deflation to end this year. The reason is that producer prices is very much a reflection of input prices from raw materials prices. This is not just a Chinese phenomenon but the case also in US and Europe.”

“Given our expectation that industrial commodity prices will increase gradually this year on the back of a moderate recovery in Chinese construction, we believe the four years of Chinese producer price deflation will be over by the end of 2016 and expect PPI to rise 1% on average in 2017.”

“We believe that Chinese policy makers is stepping to the sideline now in terms of further stimulus. Another rate cut cannot be ruled out but any further easing from here is likely to be limited in our view as there are now clear signs the economy is recovering and still has not fully felt the effect of policy easing that has already taken place.”