China's PPI deflation deteriorates

China's CPI rose 1.6% y/y in July, up from 1.4% in the prior month and a notch higher than market expected, due to rising pork prices. 

While the surging pork prices could continue to add pressure on CPI inflation in the next few months, a strong pass-through effect is not seen from the overall food prices. In the meantime, PPI declined by 5.4% y/y, the lowest since the global financial crisis and compared with -4.8% in June. 

The recent plunge of commodity prices led by oil should have played an important role in driving PPI inflation lower. More importantly, the deterioration of PPI deflation also reflects the weakness in both domestic and external demand, as well as continued de-leveraging process in China's manufacturing sector. 

Chinese foreign trade data for July were a major disappointment. Both exports and imports were down by more than 8% year-on-year. 

"The People's Bank of China (PBoC) has shifted the USD-CNY fixing slightly lower for today (to 6.1162) and is probably hoping to stop speculation about a further CNY depreciation on the back of the unfavourable data. This assumption is supported by the recent decline in the PBoC's FX reserves, which was probably caused by USD-CNY sales to stabilize the exchange rate", says Commerzbank. 

At least the Shanghai Composite Index rose today, as stock market participants are hoping for additional support for the Chinese economy. In contrast, FX market participants are still skeptical as shown by the trends in south-east Asian currencies.

"Weak Chinese data are weighing on sentiment for the region as a whole, particularly since the probability of a US rate hike has increased and is boosting the USD", added Commerzbank.