China’s accelerating PPI inflation likely to raise global inflation outlook, says Scotiabank

In November, China’s producer-price index rose 3.3 percent year-on-year after rising 1.2 percent year-on-year a month ago. Along with rising commodity prices, the country’s producer price index rose at a more rapid rate as compared with the consumer price index last month for the first time since September 2011, noted Scotiabank in a research report. China’s accelerating PPI inflation is expected to wave through global supply chain and accelerate global inflation outlook together with U.S. President-elect Donald Trump’s pro-growth stance.

There has been a close correlation between U.S. PCE core inflation and commodity price inflation since 2013. It is better to remain vigilant on the upside potential for U.S. PCE core inflation and inflation expectations in the first quarter of 2017 on hopes for higher commodity price inflation, stated Scotiabank. It might increase the odds of the Fed rate hikes priced in Fed Funds Futures and result in broad dollar strength accordingly in the first quarter of 2017.

The upcoming December’s FOMC meeting will provide clues to the Fed’s tightening pace from the “dot plot”. The September dot-plot had indicated that the officials of Fed anticipated delivering two rate hikes next year, down from their June projection of three hikes. Moreover, the Fed projected that the fed-funds rate would settle at 2.875 percent in the longer-run, lower than the 3 percent level anticipated in June.

Meanwhile, there are slim chances for the Chinese yuan to depreciate sharply in 2017, according to Scotiabank. Politburo, which China’s 25-member top decision-making body of the ruling Communist Party, reiterated on Friday the principle of “seeking progress while maintaining stability”. China is expected to make economic stability a top policy priority for next year ahead of a reshuffle, whereas social stability would be the precondition for all other work, according to the Politburo statement.

“In the weeks ahead, we stay with our long USD against a basket of KRW, MYR and SGD position. We would buy the dollar on dips on divergent monetary policies and intermittent demand for safe-haven currency”, added Scotiabank.