CPI

Eurozone and Portugal GDP both miss by 10bps QoQ (0.1% vs 0.0% and 1.2% vs 1.3%, respectively), leading to a bit of euro weakness that was extended after WestLB announced failure to reach a restructuring agreement, causing fears of senior bondholder impairment to rise.

The consensus expectation for Chinese CPI was 5.4%. Zero Hedge's expectation based on just announced manipulated CPI data was 4.9%. Guess who was correct... In the meantime, Chinese food prices are not increasing by 5% every ten days, or over 400% annualized. Or at least, they are not doing so on rice (most likely fake) paper.

As we speculated earlier, China has just lowered the weighting of food in its CPI. The reason: the nearly 5% surge in food prices in the past 10 days. Turns out the US can still learn a thing or two about data manipulation from the Chinese...

In the early part of the week (Monday – Tuesday) China will release key lending growth data. Goldman expects the amount of CNY loans made in January to be around Rmb1.1 trillion, up from Rmb480 billion in December. The yoy growth of CNY loans is expected to fall to 18.5% yoy in January from 19.7% yoy in December. Also, January net exports are expected to decline to US$9.8 billion vs.US$13.1 billion in December. Meanwhile China CPI is expected to continue to rise to 5.3% from 4/6% previously.

For all those wondering why the Federal Reserve will likely never hike rates on the basis of undisputed surging food and energy prices, here is the reason: in the US, the food component as a percentage of overall CPI is 7.8%. In China it is 31.4%. In India 47.1%! The US CPI, therefore, is a completely irrelevant metric when it comes to measuring the one factor that has been responsible for two revolutions already year to date. In other words, if food prices were to double, US CPI would go up by 7.8%, while in China it would grow by nearly 50%. As Nicholas Colas observes when he looks at this data: "This dichotomy points to the potential for increasingly disparate monetary policies when comparing the Federal Reserve future actions to other central banks." This is a huge point that needs far greater prominence in the media, as it confirms that the very models that run central planning for the world's increasingly more involved and desperate central banks are so divergent that it is likely that the US will continue exporting inflation to the developed world long after most of its drowning in bloodshed and rioting. Genocide Ben indeed.

For now, developed markets remain strong, but the potential for EM spillover into DM exists. Perhaps it is the FX mode of transmission that catalyzes it, as the USD was bid today and looks to be creating a significant cycle bottom.

For all those who looked at today's Priced Paid component of the ISM, and had a very bad feeling about what this signifies for not only corporate margins (one word: shrinkage), but broader inflation, we good news for you: you are absolutely right. A simple regression analysis of Prices Paid to CPI data indicates that the median CPI 12 months following a PP greater than 80 (such as this morning's 81.2) is over 6%! Which of course means that the far more volatile non-core components of the CPI will likely be surging at double digit rates by then. In other words, in one year, based on a simple historical regression, the US will well be on its way to inflation that will even leave the Chinese cowering in shame. And if consumers still refuse to leverage by then, then Al Jazeera will be covering riots (following the FTC's shut down of all US media) from our own back yard. If they do, on the other hand, and with $2 trillion in excess reserves, say hello to the Shazam moment.

Risk was back on to start the week today, with $25b in Fed liquidity helping the campaign. Though safe havens saw some inflows early in the day after reports of a terrorist bombing at Moscow’s Domodedovo Airport (killing 35 and reportedly linked to Caucasus separatists), the dip was bought with semiconductors and alternative energy stocks leading the way.

Earlier we reported that based on a leak to Phoenix TV, "China's
inflation hit 4.6% in December, pushing the full-year 2010 consumer
price index up 3.3%, while the national economy grew 10.3% last year,
Hong Kong-based broadcaster Phoenix TV reported on its website
Wednesday, without citing any sources." Guess what: it was spot on. Just released CPI comes at 4.6%, just below the "official" estimate, and down from 5.1% before, while GDP of 10.3% came above expectations (and in line with leaks) of 9.5%. Lastly, the PPI came in at 5.9%, to pretend to offset some of the consumer price inflation, also spot on with the leaked number. Which begs the question: why was this data, as bogus as it is, leaked? Actually, that question, along with the data, is very much irrelevant. In the meantime, the AUDJPY and AUDUSD couldn't care less, both having barely budged by 10 pips.

All bullish on the western front on Friday, as a worse-than-expected 0.6% (vs 0.8% expected & prior) December retail sales figure is overshadowed by a 40bps tick up to 1.5% CPI YoY in December (vs 1.3% expected), a 50bps tick up to 0.8% IP (vs 0.5% expected), and earnings beats from JP Morgan Chase and Intel.

A look at the week ahead, which is expected to be more of the same. Per Goldman: "The Econfin meeting on Monday will keep the focus on the Eurozone periphery and the governments' ability to enhance the framework already in place. Inflation data out of Malaysia, UK, New Zealand and of course China will keep the issue of inflationary pressures on the agenda. Of these prints, the most critical is China’s CPI and the question of China tightening. We do expect inflation to have softened in December to 4.2%, but rising food prices through January so far suggest this softness will be short lived. We expect the Central Banks of Poland and Brazil to hike rates by 25 and 50bps respectively in response to inflationary pressures. Rates are likely to be kept on hold in Canada, Mexico and South Africa. The Turkish central bank is expected to cut rates by 25bps. The November TIC data will be dissected to determine foreign appetite for US assets."

The two big economic numbers today were a mixed bag: CPI came in below expectations of 0.2%, at 0.1%. Core was in line with expectations of 0.1%, an improvement from the prior 0.0%. Elsewhere, the November Empire Manufacturing index climbed from the abysmal reading of -11.14 (which was largely ignored due to its outlier status), almost exclusively due to a surge in New Orders, which jumped from -24.40 to 2.6. What is troubling is that the Employment index dropped from 9.1 to -3.4, which could be a shift in diffusion indices toward a decline in employment. Then again last month despite a surge in diffusion employment strength, the NFP plunged. So in this version of bizarro world, the worse the employment index, the higher the NFP will likely be. And just as troublingly, priced paid jumped from 22.1 to 28.40: "the future prices paid index was positive and rose sharply, indicating that respondents expected input prices to accelerate." Continuing margin contraction anyone?

The much awaited Chinese CPI and PPI have been released: CPI came at 5.1%, on top of the whisper number, but higher than the official consensus of 4.7%, and the highest number by far in over two years. PPI beat by 100 bps, printing at 6.1%, compared to 5.1%. This "data" should be sufficient to negate the impact of last night's RRR hike and force the PBoC to raise its interest rate, as if the Chinese central bank does not act, one would wonder why the Politburo would allow the release of data which would only enflame the domestic inflation scare even more.

The October Consumer Price Index came at 0.2%, on expectations of a 0.3% rise, compared to a previous read of 0.1%. The CPI ex-Food and Energy was unchanged, also below expectations of a 0.1% rise. And somehow, despite what is obviously a massive campaign for "value deflation", the BLS once again saw a barely notable increase in food prices (and an outright decline in some): "The food index rose 0.1 percent in October after a 0.3 percent increase in September. The index for food away from home rose 0.1 percent while the food at home index was unchanged.... The fruits and vegetables group posted the largest decline, falling 0.7 percent, while the index for nonalcoholic beverages fell 0.5 percent. " Elsewhere housing starts and building permits both missed expectations by a wide margin, coming in at 519 (vs exp of 598K), and 550K (vs exp of 568). Starts plunged from a revised 588K the month prior. One wonders how this contraction for the builders will be spun.

Yesterday we highlighted that Goldman had closed out its long China trade in anticipation of reactionary measures to what the Beijing politburo decided to telegraph as high inflation (after all there is no such thing as Chinese "economic data": it is whatever the central committee agrees on). The news sparked a fresh wave of selling in the SHCOMP resulting in the biggest two-day selloff for the index in months. Today, Goldman pours more fuel on the fire, by raising its 2011 Chinese CPI expectations from 1.3% to 4.3%, which guarantees that the State Counsil will have to hike rates as it is obvious that the CNYUSD currency peg will not be removed as long as it is being used as a political scapegoat by Washington. Furthermore, ongoing insanity by the Fed guarantees that surging commodity prices will generate even more inflation in China, which in turn will eventually lead to higher prices in the US, leading to greater margin contractions, leading to more layoffs, leading to the need for what the Chairman will see as even more QE, thereby compounding the most virtuous cycle in the global economy that nobody talks about, as more and more money sloshes around the global system, and finds packets of least resistance. However that is a topic for Q1 2011.