Global Daily – Upside US inflation surprise and strong China trade

The other key driver was car insurance, which jumped 3.3% m/m, however this followed significant deflation in this category over the past year (likely reflecting the sharp fall in accidents due to reduced travel), and in level terms car insurance is still below where it was before the pandemic. Elsewhere, inflation was still largely subdued, with for instance apparel continuing to be a drag on goods inflation.

…and the outlook remains benign – Annual headline inflation rose to 2.6% in March, and although the run-up in oil looks to have dissipated, base effects could see headline inflation topping 4% in April and May, before rapidly easing back subsequently. For core inflation, we seem to be seeing the beginnings of some catch-up in key categories, and we expect this to gain momentum in H2 once covid restrictions have been fully lifted, and demand conditions normalise. However, we do not subscribe to the view that demand-side pressure will build to an excessive degree, and with significant slack still remaining in the economy, supply side conditions should be sufficient to accommodate the recovery. We also do not expect the pickup in production and international trade costs – evident in the upside surprises in PPI inflation last week – to have a meaningful impact on the CPI, with such costs representing a relatively small input to consumer prices. As such, the outlook for inflation remains a broadly benign one, and we expect the Fed to therefore fully look through this bounce in inflation. (Bill Diviney)

China Macro: Trade data point to strengthening external and domestic demand, as well as a shift from pandemic-related demand – As China is the world’s leading trading nation, its foreign trade data are often regarded a useful indicator for the state of global goods trade. China’s trade data for March published this morning show very high annual growth rates for both exports and imports. Exports in dollars came in at 30.6% yoy, a bit weaker than expected (consensus: 38%, versus 61% in Jan/Feb combined). Imports in dollars rose by 38.1% yoy, which was better than expected (consensus: +24.4%) and the Jan/Feb number (22%). In the whole of Q1, exports rose by 49% yoy and imports by 29%. One should be a bit careful being overenthusiastic about these bumper annual growth numbers, as these are impacted by a particularly strong base effect. One year ago (in March 2020), Chinese foreign trade was still in the early stages of the recovery from the extreme Covid-19 shock.

That said, if we look at developments over the past few months, imports in particular have picked up sharply. That is in line with the recovery of China’s PMIs (including the import PMI), following some weakness due to renewed lockdowns and mobility restrictions in the run-up to the Lunar New Year period in mid-February following a flare-up in new covid-19 cases. Hence, China’s import data form another signal that domestic demand has shown a rebound from this weakness. Meanwhile, exports remain solid as well, which is in line with the recovery of China’s export PMIs in March (both from Caixin and NBS) to expansion levels. By destination, exports to the US and the EU did particularly well. By product type, ‘pandemic specific’ exports (IT sectors related to working/staying at home and medical supplies) – that were the driver of China’s export outperformance last year – seem to have lost some momentum, and are now underperforming overall exports now that the global pandemic has shifted to a new phase. (Arjen van Dijkhuizen)