Chinese Factory Prices Another Factor in Global Reflation

Forget about Donald Trump. The global reflation trade may have another driver that proves to be more durable: China’s rebounding factory prices.

The producer price index has staged a 10 percentage-point turnaround in the past 10 months, posting for January a 6.9 percent jump from a year earlier. Though much of that reflects a rebound in commodity prices including iron ore and oil, China’s economic stabilization and its efforts to shutter surplus capacity are also having an impact.

For the global economy, it’s the pass-through of China’s rising costs via exports that matters, and Chinese manufacturers long squeezed by increasing wages have been raising their asking prices. For some market participants, it’s China rather than the U.S. that’s provided the main boost to global bond yields from their mid-2016 lows, rather than hopes for reflation from the new Trump administration’s tax and regulatory reforms.

“The potential of the ‘reflation trade’ constructed around the narrative of a new administration stimulating the U.S. economy looks to be overstated,” said Michael Shaoul, chief executive officer at Marketfield Asset Management in New York. “But the alternative version that is based on a solid recovery in the global economy that comfortably beats the muted expectations of investors would still seem to have plenty of time ahead of it.”

And the key to that turnaround is China, says Shaoul.

Benchmark 10-year yields from U.S. Treasuries and German bunds to U.K. gilts and Japanese government bonds all bottomed in July and August 2016, just as China’s PPI was ending its 54-month stretch of declines. China’s steady move away from deflation suggests a support for global rates should disappointment with Trump reflation policies set in.

via Bloomberg

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza