The global economy is now facing the twin headwind of sovereign crisis in Europe and a slowing Chinese economy. With the Chinese CPI touching 2.8% and close to the 3% rate which is supposed to trigger emergency measures like rate hike.
Question though is, in a highly overheated economy, is the Chinese inflation really as low? Despite having several control mechanisms and administered pricing regime, Chinese inflation is spiraling and the people are unwilling to accept the official data.
While the Chinese CPI is below 3%, the PPI numbers are more than double.
But, even that might not explain. If we use the difference between the growth rate of nominal GDP and the growth rate of real GDP, one can arrive at some proxy for inflation and the numbers look interesting. With the Q1’10 number released recently, the differential stood at a whopping 12.2%.
Data sources: National Bureau of Statistics, China
Do investors care as much for soveregin rating? An interesting tidbit.
Last week Russia issue Eurobond worth as much as USD5.5 bn and it sailed through despite a rating of a mere BBB. In comparison Greece is BBB-, Portugal AA and Spain AAA. One is free to infer from this. what say you?
The March income and spending data showed a jump of 0.3% and 0.6% respectively. With rising spending, the US Savings Rate fell to 2.7% from 3%, which is now at an 18 month low. This, apparently, is an indication of rising consumer confidence. As consumers started buying (read it as base effect), aided by tax refunds, savings dipped. Whether this is sustainable, only time will tell. More so, because the home buyer credit finally ended on 30th April, after enjoying an extended run. Clearly, the run up is being pumped by steroids like tax refund, ultra low interest rates, purchase benefits etc.
Problem is, employment growth is hardly visible and, as a result, income growth remains muted. While the issues mentioned above are contributing to falling savings, the impact will be disastrous for the over-leveraged US consumers in the long run, although the short term impact might be seen as positive.
Lets point to the housing market for the time being. According to the Northwestern University researchers, 31% of all U.S. foreclosures last month were initiated by homeowners who were is a mess but nonetheless could keep with their payments. That compares with 22% the same month last year. According to First American Corelogic, their House Price Index or HPI forecast turned less optimistic in the latest update, showing a softer recovery than in previous forecasts. Their forecasts for the inventory of homes for sale have risen as interest rates are expected to rise, tax credits expire, and slower than expected sales over the winter due to the weather. Collectively these effects act to contract demand (put downward pressure on prices).
If indeed house prices soften as expected and over enthusiastic equity prices start to adjust, another blow to consumer spending is expected, unless there is a dramatic increase in employment. To me, this is not going to happen. It would make sense to consider the current spurt as an aberration.