International | Dec 14 2007
By Greg Peel
GaveKal’s own international price indicator has begun to tick up, confounding the analysts’ earlier and established view that the world was entering a sustained “deflationary boom” period.
CPIs are on the move in Sweden, France and Germany, and China. GaveKal had been expecting European inflation to stall due to the strength of the euro, but it hasn’t. But what’s worse is that GaveKal expected the recent spurt in the Chinese CPI to be largely associated with a cyclically high price for pork – a Chinese food staple. However, the release of the Chinese CPI figure this week showed a more broadly-based increase in prices.
This means Hong Kong re-export prices have begun to rise, and that reflects prices paid by the Western world for Chinese goods. US import prices were up by 9% in October and by 11.4% in November.
To add fuel to the fire, as of January 1 the Chinese government will begin to tighten up labour market regulations for Chinese employers. The effect of this initiative will be upward pressure on Chinese wages, which had begun to slow in growth.
With all the recent turmoil in global credit markets, investors have been pouring into US bonds at an effective real yield of 1.6%. This “flight to safety” belies the fact global inflation is on the rise. GaveKal wrote the report on which this story is based prior to last night’s massive 3.2% increase in US November PPI.
There has been some easing off of bond purchases since the announcement of the Fed’s global rescue package, which includes the auction of at least US$40bn of funds. But it has looked like the world has been gearing up for a Japanese style “deflationary bust”. However, with liquidity flooding the system and inflation rising GaveKal suspects that bond yields are in for a much more significant jump. Asia and the Middle East are moving in to provide funds in the stock market and, as long as growth holds up, the world should not be looking at another Japan-in-the-90s scenario, GaveKal suggests.
