The 1% YoY inflation rate was the highest since Feb. 2009. No breakdown is available yet but comps with weak early 2009 food and energy prices are the likely culprits.

The rate of unemployment, meanwhile, rose to 10% in December from a revised 9.9% in November. But the figure was below expectations, indicating that although businesses continue to cut costs, they are doing so at a slower rate.

While that was the highest rate since August 1998, Eurostat had originally reported the November rate was 10%.(…)

The country breakdown of the Eurostat survey shows that unemployment was stable in the two largest economies. The German rate was unchanged at 7.5%, while in France it also held steady at 10%. Italy, however, reported a two percentage point increase to 8.5%. In Spain, the rate edged up to 19.5% in December from 19.4% a month earlier, Eurostat said.

In the euro zone, the number of people without jobs rose only a little to 15.763 million, while the number of people in the 27-member EU without jobs rose marginally to 23.012 million.

Full WSJ article


German Producer Prices Unexpectedly Fall

German producer prices fell 0.1% in December from November and were down 5.2% from a year earlier, the Federal Statistics Office, Destatis, said Wednesday. (…)

However, core inflationary pressures also weakened sharply due to a sharp drop in orders and capacity utilization. Prices for intermediate goods were down 3.6% from a year earlier, despite rising 0.2% on the month. Prices for consumer goods were unchanged from November and were down 1.1% on the year.

Full WSJ article


U.K. Factory-Gate Prices Climb

(…) In a sign of growing underlying price pressures on U.K. manufacturers, the ONS said output producer prices rose 0.5% from November and were 3.5% higher than in December 2008 — the highest annual rate of increase since January 2009.

U.K. factory-gate prices have climbed for 10 straight months now, putting upward pressure on consumer prices. The pressure on December’s output producer prices was broad-ranged but came principally from scrap metals, transport and food prices, the ONS said. Transport prices rose 1.2% on a month-to-month basis, while food prices were up 0.6%.(…)

Core output prices — which exclude food, beverages, tobacco and petroleum –rose 0.7% on the month, their highest level since May 2008. Core prices were up 2.6% on the year. Input producer prices for materials and fuels that manufacturers use rose 0.1% on the month and 6.9% on the year despite a significant fall in crude oil prices.

Crude oil costs were a drag on input prices, falling 2.2% on the month. But almost every other sector of prices saw an increase, with imported food materials rising 1.0% and imported parts and equipment up 1.4% on the month.(…)

Full WSJ article


U.S. Now a Renters’ Market

Since rent and owners’ equivalent rent account for nearly 33% of the US CPI, core inflation will remain subdued for a while.

The apartment vacancy rate ended the year at 8%, the highest level since Reis Inc., a New York research firm that tracks vacancies and rents in the top 79 U.S. markets, began its tally in 1980. Rents fell 3% last year, according to Reis.

In New York City, the vacancy rate improved by 0.1 percentage point for the second straight quarter, but around 60% of rental buildings dropped their rents in the fourth quarter from the previous quarter. Effective rents — which include concessions such as one month of free rent — fell 5.6% in New York last year, the worst since Reis began tracking the data in 1990.(…)

Landlords were also hit last year by competition from a wave of new supply that hit the market. The 120,000 units that came onto the market last year, including some busted condo projects that had to be converted to rentals, represented the most new construction since 2003, according to Reis.(…)

Marcus & Millichap is to release a separate report on Friday that forecasts a further 2% to 3% drop in apartment rents over the next year, most of which will be concentrated over the next six months. (…)

Full WSJ article


Euro-Zone Inflation Accelerates

The euro zone’s annual inflation rate rose as expected to a 10-month high of 0.9% in December from 0.5% the previous month, but remains well below the European Central Bank’s target, preliminary data from the European Union’s Eurostat agency showed Tuesday.(…)

No detailed breakdown of the December figure was available. The annual inflation rate rose in November due to higher alcohol and tobacco prices and a slower fall in energy prices.

Economists said the December pickup in inflation was probably driven by energy price effects, reflecting the low oil price in December 2008. But they said core inflation, which excludes volatile items like energy, food, alcohol and tobacco, was likely to be steady.(…)

Full WSJ article


Walmart aims to cut supply chain cost

Good for inflation as WMT tends to pass cost savings on to consumers.

Walmart is launching a drive this year to cut billions of dollars of costs from its supply chain by combining its store purchasing across national frontiers in a new stage in the globalisation of its business.

The effort is part of plans by the world’s largest retailer to increase the proportion of goods that it buys directly from manufacturers, rather than through third-party procurement companies or suppliers.(…)

Mr Castro-Wright has estimated that shifting to direct purchasing could reduce costs by 5-15 per cent across the supply chain within five years – suggesting potential savings of $4bn-$12bn if the retailer were to meet its long-term goal of shifting to sourcing about 80 per cent of purchases directly.(…)

Full FT article



It is logical to assume that this year’s massive increase in credit and liquidity will generate serious consumer price inflation in China, but there are several factors which we believe will keep CPI moderate, at least in the near term. Rising M2 will instead lead to continued asset-price inflation, with potential problems in 2011.

30% rise in M2
China’s huge stimulus has been funded by a 122% YoY increase in new bank lending and a 30% rise in M2. Economists would normally expect this rapid increase in money supply – – M2 was growing at half that pace a year ago – – to result in higher prices, or inflation. But the equation is actually a bit more complex. A rise in the quantity of money in an
economy can cause three consequences: a rise in prices; a rise in quantity of output; or a fall in the velocity of money.

In the near term in China, we are more likely to see rising output and falling velocity of money, rather than inflation. Let’s take a quick look at each of the three possible outcomes of rising money supply.

Output is rising
First, it is clear that output is rising. The government’s PMI output index image for manufacturing has been in expansion for the last 10 months, after having been in contraction for the previous 4 months. Apparent consumption of metals has been rising this year, and power generation – – a good proxy for heavy industry output – – rose every month since June, including a 27% YoY jump in November. Value-added in the chemical sector, for example, rose 31% YoY in November, compared to a decline of 3% a year earlier. Value-added in food manufacturing rose 21% in November, up from 10% a year ago. And with retail sales up 16% and household expenditure up 9%, it is clear that rising output is responding to strengthening demand.

Milton Friedman famously wrote that ‘inflation is always and everywhere a monetary phenomenon,’ but he qualified that statement by adding that ‘. . . in the sense that it [inflation] cannot occur without a more rapid increase in the quantity of money than in output.’ Although output is rising in China, it is not rising at the 30% speed of money
supply growth, so this only partially offsets the impact of rapid M2 growth.

Velocity of money falling
This is where the falling velocity of money comes into play. When image evaluating the impact of money supply growth on prices, economists usually expect the velocity of money – – the speed at which money travels through the economy, or the number of times a dollar changes hands during a year – – to remain stable, and in most cases it does. But not this year in China. The velocity of M2 fell to .56 in 3Q09 from .67 in 3Q08, and the current pace is the slowest this decade. The velocity of M1 has taken a similar fall.

This slower pace of money changing hands is reflected in Chinese bank image accounts. Since the start of the year, the amount of money in household savings accounts has risen 16% to RMB 25.3tn (US$ 3.7tn), and corporate savings has increased 32% to RMB 20.8tn (US$ 3tn). More money is staying in bank accounts, and is moving from wallet to wallet at the slowest pace in many years. This slower velocity means that much of the new money supply is not chasing goods and services; it is resting in the bank. In other words, there are more RMB in China this year, but each RMB is being used less often.

The growth rate of corporate bank deposits has increased at a pace image similar to that of overall loan growth. The growth rate of household savings has been slowing, to 22% in October from 29% in May, as consumers have withdrawn money to support their increased purchases of goods and services.

CPI growth is all about food
With output rising and the velocity of money falling, the rapid growth in money supply has not, in most cases, resulted in higher prices. Headline CPI rose to 0.6% YoY in November, a significant pick-up from the -0.5% rate in October, and the first time CPI has been in positive territory since February. But 178% of the increase came from food, as non-food prices fell by 0.7%. And most of the food price rise was attributable
to weather and seasonal factors, not increased demand.

Manufactured goods prices still falling
In the near term, we expect that a combination of rising output and falling velocity of money will mitigate the impact of rising money supply on prices. Another factor which will prevent significant inflation next year is overcapacity in almost every manufacturing sector, which limits firms’ ability to raise prices of final goods. A good example is China’s auto industry: passenger car sales rose 49% YoY through November, but the average selling price of a domestic car had fallen 2.4% as of October.

Rise in asset prices rather than CPI
The two places where rising money supply have led to price increases are in residential property and A-shares. Property prices were up 14% YoY through November, according to CLSA data, and the Shanghai composite index is up 79% from the start of the year. But these two asset-price inflation cycles will have minimal impact on consumer price inflation. (China’s CPI basket includes rental costs, which have not been rising, rather than purchase prices.)

CPI will rise in 2010, to about 3% from an average of -1% in 2009, but almost all of that increase will come from food, and the food price rises will be supply, rather than demand driven. This means that while we expect Beijing to turn to interest rate increases in 2H10 in an effort to cool off asset-price inflation, rate hikes will not be an effective tool for managing CPI. (And with GDP to grow by 8-9%, 3% CPI is healthy.)

Summary for 2010
Next year the Chinese economy should remain strong, with GDP growth again in the 8-9% range, driven by increasingly strong private investment and consumption. I expect the RMB to resume its gradual appreciation (5-7% annualised) against the dollar by 2H10. Beijing will further reduce its stimulus measure
s in response to a recovering private sector, but I do not foresee any tightening until 2H10, when they will have to start worrying about bubbles.

Bubble risk for 2011
By 2H10, when demand for goods and services will be strong, real interest rates low, profits rising and, most importantly, the property and equity markets hot, outflows from corporate and household bank accounts could generate asset-price bubbles in 2011.
Timing will be everything next year.

Andy Rothman
China Macro Strategist
CLSA Asia-Pacific Markets


Wen Says Inflation Is a Concern, Defends Yuan Rate

Chinese Premier Expresses Worry About Nation’s Rising Property Prices, Sees Need for ‘Balanced’ Bank Lending

(…) Speaking to the state-run Xinhua news agency on Sunday, Mr. Wen also flatly rejected foreign criticism of China’s exchange-rate policy, saying that stability in the yuan’s value helps the global economy and that China won’t bow to pressure to let it appreciate. "Keeping the yuan’s value basically steady is our contribution to the international community at a time when the world’s major currencies have been devalued," he said.(…)

“As I have told my foreign friends, on one hand, you are asking for the renminbi to appreciate, and on the other hand, you are taking all kinds of protectionist measures,” he said.

“The purpose [of these calls for appreciation] is to hold back China’s development,” he added.

China dropped its formal dollar peg in 2005 and has since allowed the renminbi to trade within a narrow band. But since the middle of last year it has operated a de facto peg. This has meant that the renminbi has depreciated about 9 per cent against the currencies of its main trading partners since early this year, even though the Chinese economy has rebounded quicker than any other major economy.

However, Chinese officials argue that its exchange rate against its trading partners is roughly in line with its level at the start of the global financial crisis in September last year, when the US dollar initially strengthened.

Lex ChartMr. Wen said property prices are rising "too quickly" in some cities, a situation demanding "great attention" from the government. He said tackling the high prices includes cracking down on price gouging and land hoarding, and possibly adjusting interest rates. He said in the two-hour interview that too much bank lending earlier in the year may have economic costs.

(…) "China is not facing an inflation issue for the moment," Mr. Wen said. "But we should foresee such a possibility and maintain consumer prices at a reasonable range."

Mr. Wen didn’t explicitly rule out (yuan) appreciation, but instead said that no such change would occur because of foreign pressure.(…)

"It would be good if our bank lending was more balanced, better structured and not on such a large scale." He added that the situation "has been improving in the second half of this year."(…)

Full WSJ article and FT article. Chart from FT Lex