Chinese Inflation Report Sends Equities Lower on Potential Rate Hikes; Markets Continue to Focus on Earnings
Overnight, China released its GDP report for the first quarter, which showed a rise of 9.7% from Q1 2010. The rise is significant and did surpass market expectations of 9.5% but the rate of growth has slowed from the 9.8% rate of growth that was seen in the fourth quarter of 2010. Monthly CPI was released at the same time and this showed that inflation accelerated the highest level in 3 years during the month of March, sending signals to that market that the PBoC will have no choice but to tighten monetary policy and raise lending rates. Markets focused most heavily on this aspect of the release and sent equities lower during the Asian session.
The consumer price index showed a yearly rise of 5.4% for the month of March, which is a drastic increase from the 4.9% rise that was seen in February. This is the fastest pace in price increases since July of 2008. Markets were looking for a rise of 5.3%.
The Chinese government has released many statements vowing to reduce inflation and maintain price stability, raising interest rates four times since last October and issuing government orders to companies like Unilever PLC (English consumer goods manufacturer) to delay price hikes for its products. But these methods have so far proved ineffective. The government’s target inflation rate is 4%.
The Chinese producer price index (PPI), which measures factory input prices, rose 7.3% on a yearly basis for the month of March, the data showed. Median forecasts were calling for a rise of 7.4%. PPI is generally thought of as a leading indicator for CPI, as producers tend to pass input prices on to customers.
The main issue going forward is whether or not China will be able to reduce price pressures (to prevent excessive instability) without damaging growth prospects. Markets are now expecting at least one more interest rate hike in 2011 and an implementation of regulatory measures to reduce bank lending.
Today, markets will turn the attention back to corporate earnings, where profit margins and inflationary pressures are seen as the most potentially problematic factors. In macro data, we will have the Eurozone CPI for March coming out at 9:00 GMT with yearly expectations calling for a rise of 2.6 percent. The ECB’s target rate for inflation is 2%.
Nestle, which is the largest food company in the world, yesterday reported sales numbers for the first quarter. These rose 6.4 percent on a yearly basis, surpassing markets expectations on growing consumer bases in Asian markets.
Google also released its first quarter earnings, which showed an earnings per share of 8.08 Dollars against expectations of 8.12 Dollars. The lower numbers appear to be related to higher hiring and marketing costs. Major advertising competition for Google comes from Facebook and Apple, so recent investment decisions by Google are being questioned by markets because of the possibility that margins could show weakness. At time of writing, Google shares are down 2.6 percent toward the end of the North American session. Dow Chemical released a statement yesterday showing that quarterly dividends will increase to 0.25 Dollars per share from 0.15 Dollars previously.