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Chinese deflation

Market Update

05.03.2024

What happened last week?

US

  • Apple ditched its decade-long Electric Vehicle (EV) project.

Europe

  • Swedish firm Klarna showed off slimmer losses ahead of its expected stock market debut.

Asia

  • Inflation in Japan topped expectations in January and the Nikkei index hit a new record.

What does this mean?

Core consumer prices in Japan, which exclude fresh food, rose by 2% in January from a year ago – a slowdown from the 2.3% increase seen in December but a tick higher than economists expected. It was the 22nd straight month in which the inflation measure matched or exceeded the Bank of Japan’s 2% target, adding weight to the notion that the central bank might soon scrap its negative interest rates. The Nikkei index hit a new record above 40,000.

Apple unexpectedly cancelled its decade-long EV ambitions. The firm launched “Project Titan” in 2014 in a drive to diversify beyond its popular iPhone, which accounted for 52% of Apple’s revenue last year.

But with the project making little progress and the EV industry slowing way down, Apple sent the whole thing to the scrap yard to focus on AI and headsets.

Klarna bagged 22% more revenue last year than the one before, enough to shrink its net loss by 76%. That’s come at a lucky time for the firm, which makes money by charging retailers a fee every time a shopper uses the service. The buy-now-pay-later leader is aiming for a $20 billion valuation in its initial public offering later this year, and if it wants investors to buy in, it will need to show that it can fix its own finances as well as those of its customers.

This week’s focus: Chinese deflation

Whilst much of the world contends with overly hot inflation, China is struggling with the opposite problem: deflation. The most recent report showed consumer prices fell by 0.8% in January from a year ago – the biggest drop in almost 15 years and worse than expected. That was the fourth straight month of falling prices in the world’s second-biggest economy. This unlucky streak is set to continue, with economists expecting that February’s inflation report, out March 9th, to show a drop of 0.5%. This is despite the Lunar New Year holiday falling in February this year, rather than in January – a timing difference that would typically lead to an upward bump in the figures.

Prolonged deflation – a result of weak domestic demand, an ongoing property crisis, a sluggish job market, and falling exports – is becoming a growing worry for China because the situation can lead to a downward spiral of economic activity. Anticipating further price drops, consumers might delay purchases, further hobbling consumption. Businesses, in turn, might lower production and investment because of the uncertain demand picture. This cycle is tough to reverse. That’s why the Chinese central bank has said that fighting deflation is at the top of its to-do list, but for it to put a big green check beside that task, economists say it will have to implement more aggressive stimulus measures to beef up demand and confidence.

There is a silver lining (for the global economy, at least): China’s deflation could push down inflation rates in other parts of the world, as the country’s exporters cut prices on goods they sell abroad. We’ve already seen signs of that in the past couple of months, with prices falling at their fastest rate since the 2008 financial crisis. If China does end up exporting its deflation to the rest of the world, that could hasten central banks’ decisions to begin cutting interest rates.

The Week Ahead

  • Monday: Eurozone economic sentiment (March).
  • Tuesday: China PMI (February), eurozone producer prices (January), US factory orders (January). Earnings: CrowdStrike.
  • Wednesday: Eurozone retail sales (January), Bank of Canada interest rate announcement, US job openings and labour turnover survey (January). Earnings: JD.com.
  • Thursday: European Central Bank interest rate announcement. Earnings: Broadcom, Costco.
  • Friday: Japan household spending (January), US jobs report (February), China loan growth (February).
  • Saturday: China inflation (February).

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