Chief Economist of Guosheng Securities, Director of China Chief Economist Forum, Dr. Xiong Yuan
Guosheng Securities macro analyst, Liu Anlin
Event: March CPI was 0.1% year-on-year, expected 0.3%, previous value 0.7%; PPI -2.8% year-on-year, expected -2.7%, previous value -2.7%. Among them: since late October 2023, international copper prices have risen significantly, and as of April 9, LME copper prices have increased by 18.8%,
Core conclusion: The price in March was lower than seasonal and lower than expected, and the essence was insufficient demand, which further highlighted the current temperature difference between macro and micro, indicating that price stabilization urgently needs to be increased by policy, especially on the demand side.
The core changes in prices in January and March are: CPI and core CPI both fell significantly, lower than expected and lower than seasonal, and the decline in food and tourism prices was the main drag; PPI continued to weaken, declining month-on-month for 5 consecutive months, and the lower prices of infrastructure chains such as steel and cement were the main drags.
2. Looking ahead, the short-term CPI may continue to increase slightly, and the uncertainty of PPI turning positive year-on-year will increase, and it may be in the second half of the year at the earliest (it was expected to turn positive around the second quarter).
3. Based on a comprehensive review of the current round of copper price trends:
In essence, copper has both commodity and financial attributes;
In retrospect, the current round of copper price rise can be divided into two stages: from October to December 2023 and from February 2024;
In contrast, we should pay attention to two points: the trend of copper prices (determined by internal and external demand) VS rebar prices (determined by domestic demand) diverges; copper and oil will begin to peak and fall from December 2023;
Looking ahead, it is expected that copper prices may be strong as a whole during the year, and the short-term focus will be on the performance of US inflation and the recovery of China's economy.
The text is as follows:
1. In March, the CPI fell significantly, the core CPI hit a new low in the same period month-on-month, and the PPI continued to be weak, with 4 signals
1. Overall, the core changes in prices in March are as follows: CPI and core CPI both fell significantly, lower than expected and lower than seasonal, and the core CPI hit a new low in the same period since the data were available; Specifically, the CPI in March increased by 0.1% year-on-year, lower than the Wind consensus expectation of 0.3% and the previous value of 0.7%, and -1.0% month-on-month, significantly weaker than the seasonal pattern (the average value of the same period from 2014 to 2023 was -0.5%). Among them, the core CPI fell by 0.6 percentage points year-on-year to 0.6%, and -0.6% month-on-month, a new low for the same period since the data began (the average of the same period from 2014 to 2023 was -0.1%). PPI -2.8% year-on-year, lower than the Wind consensus expectation and the previous value of -2.7%, -0.1% month-on-month, 5 consecutive months of month-on-month decline, still weaker than the seasonal pattern (2014-2023 average 0.2% in the same period), coal, steel, cement and other prices are the main drag, the essence is still the real estate downturn, infrastructure physical workload is weak.
2. Looking ahead, short-term CPI may continue to increase slightly, and the uncertainty of PPI turning positive year-on-year will increase, and it may be in the second half of the year at the earliest (previously expected to turn positive around Q2). According to the model, considering factors such as consumption recovery, oil prices, pork prices and seasonality, it is expected that the CPI may continue to increase slightly positive in April, and the PPI may continue to increase negatively, but the decline is expected to be narrower. It should be noted that if the PPI continues to be less than expected in the next 1-2 months, it will be more difficult for the PPI trend to turn positive in the second half of the year, and it may fluctuate around 0%, and the center of the whole year may fall to about -1% or even lower.
3. On the whole, the price in March was lower than seasonal and lower than expected, and the essence was insufficient demand, which further highlighted the current temperature difference between macro and micro, indicating that the policy to stabilize prices urgently needs to be increased, especially on the demand side. On the one hand, the top priority is to stabilize aggregate demand and make a fuss on the demand side as much as possible, for example, core cities can relax real estate policies more vigorously to stabilize housing prices and expectations, further increase the issuance of consumption vouchers, and increase subsidies for the trade-in of bulk consumer goods such as household appliances; on the other hand, we should speed up the construction of the 'three major projects' and speed up the issuance of ultra-long-term special treasury bonds and special bonds, so as to form more physical workload; in addition, the urgency and necessity of further RRR and interest rate cuts will also increase.
4. In terms of structure, the price data in March 2024 mainly has the following characteristics:
Due to the decline in demand after the holiday, the prices of food and travel fell significantly, driving the CPI food and non-food items to fall more. In March, the CPI food sub-item was -3.2% month-on-month, down 6.5 percentage points from the previous value, weaker than the seasonal pattern (the average month-on-month value from 2014 to March 2023 was -2.2%), of which: due to the decline in demand after the holiday + high temperature and sufficient supply, the prices of fresh vegetables, pork, eggs, fresh fruits and aquatic products fell by 11.0%, 6.7%, 4.5%, 4.2% and 3.5% respectively, dragging down the CPI by about 0.54 percentage points month-on-month. Non-food items were -0.5% month-on-month, down 1.0 percentage points from the previous value, and also weaker than the seasonal pattern (-0.04% month-on-month average from 2014 to March 2023), and the decline in post-holiday travel demand was the main drag, with air tickets, transportation rentals, and tourism prices falling by 27.4%, 15.9% and 14.2% month-on-month respectively, totaling a drag of about 0.38 percentage points on the CPI.
: Core CPI and CPI services fell significantly month-on-month, both hitting new lows in the same period. Among them: the core CPI in March was -0.6% month-on-month, and the CPI service sub-item was -1.1% month-on-month, both of which hit a new low in the same period since the data was available, and fell by 1.1 and 2.1 percentage points respectively compared with the previous value.
:P PI's means of production narrowed month-on-month, and the prices of means of subsistence were flat. In March, the decline in PPI means of production narrowed by 0.2 percentage points month-on-month to -0.1%, and the means of subsistence were -0.1% month-on-month, unchanged from the previous month. Among them, the means of production involved three categories of mining, raw materials, and processing industries, and the prices in March were -1.0, +0.7, and +0.1 percentage points to -0.8%, 0.3%, and -0.2%, respectively, and the prices of means of living involved four categories: food, clothing, general daily necessities, and durable consumer goods, and the prices in March were -0.4, +0.1, +0.2, and 0.0 percentage points to -0.4%, 0%, 0%, and 0%, respectively.
Most of the prices of coal, black, and building materials have fallen, and the PPI of crude oil, copper and other industries have mostly rebounded. Specifically, in March, the PPI of coal mining, black smelting, and cement manufacturing industries was -1.6%, -1.2%, and -1.2% month-on-month respectively, and the lack of demand caused by the downturn in real estate and the weak physical workload of infrastructure was the main drag; due to the overcapacity of the middle and low-end, the prices of new energy vehicles and lithium batteries were -1.3% and -0.9% month-on-month respectively, which was also an important drag on PPI. Due to the rise in overseas crude oil and copper prices, the PPI of oil and gas exploitation and non-ferrous smelting industries increased by 1.1% and 0.6% month-on-month respectively in March.
2. Review and outlook of the current round of copper price rises
1. In essence, copper has both commodity and financial attributes. Among them: 1): demand determines the direction of copper prices, China, the euro area, the United States and other three major economies account for more than 70% of global copper consumption, the world, China, the United States, the euro area PMI, OECD composite leading indicators are good observation indicators; supply will affect the magnitude of copper prices, you can pay attention to the capital expenditure of copper production enterprises may affect the long-term supply of copper, copper producing countries (mainly Chile, Peru, etc.) labor problems, natural disasters, production and export policies are short-term disturbances.
2) Focus on U.S. inflation expectations, interest rates, exchange rates and other influencing factors, among which: U.S. inflation expectations (10-year U.S. Treasury yield-TIPS) and 10Y U.S. Treasury yields are strictly positively correlated with copper prices, while the U.S. dollar index is negatively correlated with copper prices. The logic behind this is that if the U.S. economy strengthens and U.S. inflation expectations and 10Y Treasury yields both rise, the demand for copper will increase and the price of copper will rise, and vice versa, the demand for copper will decline and the price of copper will fall. The U.S. dollar index can affect copper prices in two ways, one is that the U.S. dollar has safe-haven properties, and when the U.S. dollar index is strong, the global economy tends to be poor, which in turn affects copper demand. Second, copper is denominated in US dollars, if the US dollar depreciates, on the one hand, the purchasing power of non-US dollars will increase, and the demand for copper in non-US countries will increase; on the other hand, the production cost of non-US countries will increase, and the supply will decrease, so that copper prices tend to rise.
2. Looking back, the current round of copper price rise can be divided into two stages:
1) From October to December 2023, there are two supports for the rise in copper prices at this stage: first, copper mine contract disputes in Panama and other places, which led to a disturbance in copper mine supply expectations, and second, the eurozone economy is stronger than that of the United States, and the dollar index has fallen.
2) Since February 2024, the supporting factors of copper prices at this stage have increased, and copper prices have risen faster, including: first, the U.S. economy is stronger than expected, and the ISM manufacturing PMI has returned to the boom and bust line after 16 months; Third, the shutdown of copper mines in Peru and other places has intensified, and the disturbance of copper mine supply has increased; moreover, the reduction of copper ore supply in the early stage has led to the reduction of downstream smelting production, and the TC (copper smelter spot refining fee) and RC (copper smelter spot refining fee) have fallen sharply, and the impact of copper mine shutdown has been further transmitted downstream; fourth, the US CPI rose again year-on-year in March, driving the US inflation expectations (10Y U.S. Treasury yield-TIPS) higher.
3. In comparison, we should pay attention to two points: the trend of copper prices and rebar prices diverges, and the copper and oil prices will begin to peak and fall in December 2023
1): Historically, copper prices and rebar prices have been basically the same, reflecting changes in final demand, but after the Spring Festival, there has been a significant divergence between the two prices. The reason for this situation, according to our understanding, may be due to the fact that copper is mainly affected by both domestic and foreign demand, of which domestic demand mainly depends on the manufacturing industry, and rebar is mainly affected by domestic demand, especially real estate and infrastructure. Moreover, it can also explain the "temperature difference" between recent statistics bureau data and high-frequency data to a certain extent (high-frequency data is more biased towards real estate and infrastructure).
2): Generally speaking, if the copper oil price ratio rises, it means that the demand in the economy may be strong, and the subsequent economy tends to rise; on the contrary, if the copper oil price ratio goes down, it means that the demand in the economy may be weak, inflation may rise, and the probability of subsequent economic downturn is large. Historically, the copper-oil price ratio has led the economy by 6-18 months, with an average of 12 months, and the current round of copper-oil price comparison peaked and fell in December 2023, pointing to the possibility that the U.S. economy may gradually weaken in 2024, but the downward range is limited.
3): Copper prices mainly affect the prices of PPI non-ferrous mining and non-ferrous smelting, which account for about 0.3% and 5.2% of PPI respectively, accounting for about 5.5% in total, of which the explanatory power of copper price changes on PPI non-ferrous mining (R2) is about 63.6%, and the explanatory strength (R2) of PPI non-ferrous smelting is about 70.0%. On a year-on-year basis, if copper prices rise by 10%, the pull of PPI non-ferrous mining and non-ferrous smelting will be 6.2 and 3.9 percentage points respectively, and the year-on-year pull of the overall PPI will be 0.02 and 0.2 percentage points respectively.
4. Looking ahead, copper prices may be strong overall during the year, keeping an eye on the evolution of inflation in the United States and the recovery of China's economy. There are three main supports for the strong copper price during the year: first, China's economy is still recovering, especially driven by policies such as export resilience and equipment renewal during the year, which is expected to drive the overall strong investment in the manufacturing industry; Mine closures are still ongoing, pointing to no signs of improvement in the supply of copper in the short term. In the short term, we can keep an eye on the macro data situation in China and the United States, and if US inflation or China's economic recovery is less than expected, it may disturb copper prices.
Risk warning: the strength of the policy and the external environment exceed expectations.
Contact: Xiong Yuan, Chief Economist of Guosheng Securities, Liu Anlin, Guosheng Macro Analyst, Liu Xinyu, Guosheng Macro Analyst, Yang Tao, Guosheng Macro Analyst, Mu Renwen, Guosheng Macro Analyst, Zhu Hui, Guosheng Macro Analyst, Xue Shuning, Guosheng Macro Researcher.