Asia Session: Chinese Inflation Figures Spur Hopes Of More Easing Measures from Beijing

It was an eventful session for investors in Asia, with Australian trade balance data and a slew of economic indicators out of China. But we still don’t have the exact details of the debt swap in Greece. Reports from the capital suggested the participation rate may be 90%+, likely involving the collective action clauses being used to bind some rebellious bond holders.

Midway through trade in Asia, inflation figures from Beijing provided some hope to the market officials would act to spur growth in the world’s second largest economy. The official CPI figure came in at 3.2%y/y, down from 4.5%y/y in January and the lowest level since June 2010, reaffirming what we already know; the measures adopted by Beijing last year to control inflation have done their job.

But what does this mean for policy going forward? Premier Wen made it clear in his Government Work Report Beijing intends to maintain a proactive fiscal policy and prudent monetary policy stance. The premier also lowered the official growth forecast to 7.5% for 2012, adding the government is willing to accept lower growth, and whilst this latest CPI figure is lower than expected it is distorted by seasonal factors which makes it very hard to predict. If we attempt to remove some of the seasonality, we see the combined annual rate for January and February is around 3.9%, just below the governments targeted level of 4%. Beijing is also very wary of a possible resurgence in inflation, especially in food prices. Consequently, once we put these factors together we expect the government will maintain its cautious easing of monetary policy.

Late in the session, retail sales and industrial production figures out of China were also below market expectations at 14.7%y/y and 11.4%y/y, respectively. As expected, however, the markets did not react significantly to the data.

In Australia, as we suspected imports decreased but significantly less than exports, which slid 8% over the month. The result was a decline in the trade balance to -673m from 1709m. Australia’s export sector is being hit hard by moderating commodity prices and soft volumes in coal and iron. We expect the export sector will continue to suffer in the short-term from weak levels of demand from some of Australia’s trading partners in Asia.

Price action in the aussie following the release of the trade data highlighted the disappointment in the marketplace, with AUD/USD immediately dipping around 24 pips following the data release, before rising on the back on the Chinese inflation data. Consensus estimate before the release pointed towards a headline figure of 1500m, and the actual figure proved to be poor enough to take investor attention away from Greece, albeit briefly.

Elsewhere, investors will be watching out for any official news from Greece about its debt swap, and focusing on the NFP report out of the US.