China’s producer prices likely to witness further upside given rebound in domestic construction activities: ANZ Research

China’s producer price index (PPI) is expected to witness further upside movement on a y/y basis, based on the recovery of domestic construction activities. Steel prices have rebounded in April, as the Lunar New Year holiday effect faded and construction activities have recovered from late March.

The steel price index (composed by the China Iron and Steel Association) has returned to 112.8 at the end of April from 108.7 from end-March. Rebar inventories have also declined from 179.7 mt to 141.5 mt in April, suggesting a more balanced demand-supply situation. The rise in oil prices should also lead to higher prices of chemicals.

Today’s inflation data should have only marginal influence on the rates market. After a quick rally in April following the PBoC’s reduction of the required reserve ratio, the market’s short-term focus is now on the liquidity conditions in the money market. Over the longer term, investors will be focusing on US-China trade tensions, USD rates, and overall economic growth.

In addition, pork prices (-16.1 percent y/y) were the key drag on overall food prices and headline CPI in April. The impact of falling pork prices on headline CPI was 0.43 ppt. As such, pork prices have been declining since February 2017 on a y/y basis, although this influence should moderate in the coming months due to a lower base.

"We are vigilant to the rise in oil prices, which will exert upward pressure on the CPI, which has a good correlation (0.55) with domestic oil prices, according to our estimates," the report added.

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