What's takeaway 1 on Moderate Chinese inflation won’t stand in the way of a rate cut?

China's CPI inflation fell to 1.0% YoY in June, suggesting room for a rate cut by the PBoC.

What's takeaway 2 on Moderate Chinese inflation won’t stand in the way of a rate cut?

Transportation food inflation contributed significantly to the CPI decline, pulling inflation lower.

What are the market implications for Moderate Chinese inflation won’t stand in the way of a rate cut?

Traders should monitor the USD/CNY closely, particularly as the market digests upcoming inflation reports and PBoC commentary. Key levels to watch include the 1.075 target, as a breach could signal increased easing expectations. Positioning in anticipation of these data points could yield opportunities in cross-CNY trades.

What are the risks to this view on Moderate Chinese inflation won’t stand in the way of a rate cut?

A reversal in this outlook could occur if inflation unexpectedly accelerates, particularly in the food sector, or if geopolitical tensions escalate, leading to higher energy prices. Any signals of a more aggressive stance from the PBoC against easing could also invalidate the current view.

Moderate Chinese inflation won’t stand in the way of a rate cut

What the desk is arguing

The desk believes that the PBoC is likely to pursue a rate cut in light of the current inflation metrics, particularly with the CPI decreasing to 1.0% in June, down from 1.2% in May. This is indicative of a broader environment where inflationary pressures are easing, particularly in non-food sectors, which aligns with the expectations outlined by ING.

The decline in fuel prices has notably influenced this trajectory, with a significant drop in transportation fuel inflation noted at 15.3% year-on-year. Moreover, the sustained deflation in food prices, especially pork, continues to exert downward pressure on overall CPI figures, suggesting that inflation is unlikely to constrain monetary policy adjustments.

Where it sits in our coverage

Our current consensus target for USD/CNY is 1.075, operating within a range of 1.04 to 1.12, with projections from key firms including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citigroup: 1.12 (Mar26)

This perspective aligns closely with the consensus, reinforcing that the market outlook is leaning towards monetary easing, potentially influencing cross-currency movements in the upcoming months.

How other firms see it

Several firms share a similar stance regarding a dovish outlook for the PBoC, notably jpmorgan and citigroup, emphasizing the inflation narrative as crucial for monetary policy direction. Conversely, firms like bofa offer a more cautionary approach, suggesting a less aggressive easing strategy.

The trajectory of USD/CNY is closely tied to PBoC's decisions, and traders should monitor any announcements or insights reflecting changes in economic policy, as well as future CPI data releases for signs of inflationary pressures.

Older quick take Quick take 03:55 China Moderate Chinese inflation won’t stand in the way of a rate cut China’s CPI inflation edged down in June as gasoline prices fell, while PPI inflation continued to accelerate. Although energy price fluctuations could influence the pace of reflation, a backdrop of modest positive inflation is likely to remain the dominant theme Source: istock Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Lynn Song Chief Economist, Greater China 1.0% YoY June CPI inflation Lower than expected CPI inflation moderated slightly in June as fuel prices dropped China's June CPI inflation slowed down to 1.0% year-on-year, down from 1.2% in May. This came in a hair lower than forecasts (market: 1.1%, ING: 1.1%), and marked a three-month low.

The primary reason for the slowdown was non-food inflation, which fell 0.4pp in June to 1.5% YoY. Within non-food categories, we saw transportation fuel inflation drop sharply to 15.3% YoY, down from 21.1% in May. Amid the broader sharp drop of crude oil prices, Beijing N92 gasoline prices were cut twice in June, and once already in July.

This suggests the category could continue to see some relief in next month's inflation data, if re-escalation fears in Iran don't materialise. In other non-food categories, we saw the daily necessities and services category drop to 1.3% YoY, down from 1.8% in May. Other categories were broadly stable, with healthcare (2.3%) boosting inflation while falling rents (-0.6%) weighing on inflation.

Food has been a persistent drag on headline inflation so far this year. This continued in June, as food edged up 0.1pp, though still well in deflation territory at -1.6% YoY. This was largely thanks to continued steep drops in pork prices, down -0.8% month-on-month and -15.9% YoY.

Other major food categories such as fresh fruit (-0.7%), fresh vegetable (-0.3%), and grain (-0.5%) prices were also mostly in deflation territory. The glaring exception was egg prices, which surged to 16.0% YoY, a 55-month-high amid reduced production capacity. Gasoline price cuts saw transportation fuel inflation drop sharply PPI inflation continued to climb amid supportive base effects PPI inflation continued to move higher in June, rising to 4.1% YoY, up from 3.9%, in line with market forecasts.

However, the June data snapped what had been a 10-month streak of stable or upward sequential price momentum, dropping -0.3% MoM. The key themes for PPI inflation looked little changed from the past few months. The primary drivers continued to be in the crude oil, coal, and non-ferrous metals industries.

Ex-factory prices for coal (20.6%), crude oil and natural gas (16.8%), and non-ferrous metals mining (25.5%) industries remained elevated, and the primary contributors to the positive PPI growth. Many other categories, such as wine, beverages, and refined tea manufacturing (-5.3%), pharmaceutical manufacturing (-4.5%), and auto manufacturing (-2.1%) remained in the deflation zone, showing that there's still work to do when it comes to restoring healthy price dynamics. Raw material prices have been one of the primary drivers for PPI momentum this year.

They slowed to 8.6% YoY in June, down quite sharply from 15.8% in May. As such, the peak for PPI inflation this year will likely hinge on whether we see re-escalation risks pushing crude oil higher again. Given less supportive base effects ahead, we believe that we're close, if not at the peak.

PPI edged up while CPI cooled in June Inflation doesn't look likely to impede PBOC easing Barring a much larger-than-expected re-escalation of tensions in the Middle East, the worst-case scenario for inflation looks unlikely to play out. While many central bankers have been weighing the necessity to contain inflation, China's price environment remains quite under control. The data is moving from near-deflation to low positive inflation.

This sort of inflation level is not likely to impede the PBOC from monetary policy action, should it deem it necessary. With loan growth still looking very weak, and domestic consumption and investment data showing troubling signs, we expect there may be a growing case for this easing sometime in the third quarter. Markets can look ahead to the 2Q GDP, June data dump, and the July Politburo meeting to gauge the level of urgency that may be needed in terms of policy support.

We look for one 10bp rate cut in the second half of the year, with odds increasingly shifting in favour of a move in 3Q instead of 4Q. Oil Monetary Policy Inflation Asia Pacific Asia Markets Asia Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.

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