GF Securities Guo Lei: PPI sees positive growth on a month-on-month basis for the first time in nearly 8 months, focusing on whether a new upward cycle can be formed

Key Points

First, the year-on-year CPI in May was 0.3%, unchanged from the previous value. The year-on-year PPI was -1.4%, higher than the previous value of -2.5%. This result roughly meets expectations. In the previous report "Macro Trading Themes Since May," our model predicted year-on-year CPI and PPI to be 0.37% and -1.34% respectively.

Second, the month-on-month CPI was -0.1%. Historically, most May figures have shown negative growth. The average month-on-month change in May over the past 10 and 20 years was -0.2%. This year's May figure is slightly above the seasonal average. Non-food prices decreased by -0.2% month-on-month, lower than the 0.1% average decrease over the past 10 years, leading to downward pressure. Food prices remained flat month-on-month, higher than the average decrease of -1.2% over the past 10 years, resulting in upward pressure.

Third, several price signals deserve attention: Firstly, pork prices rose by 1.1% month-on-month in May, marking the sixth consecutive month of year-on-year increase in pork prices. Secondly, alcohol prices decreased by -0.2% month-on-month, the lowest since 2014, possibly related to changes in consumption structure and price expectations. Thirdly, rent prices remained stable with a month-on-month and year-on-year decrease of -0.1%, indicating a trend of stabilization in rental prices. Fourthly, transportation costs decreased by -0.9% month-on-month, significantly higher than the average decrease of -0.3% during the same period over the past 10 years, possibly due to downward pressure on car prices under supply competition.

Fourth, it is worth noting that pork prices accelerated month-on-month after late May. Based on observations of the average wholesale price of pork by the Ministry of Agriculture, prices rose by 9.5% from May 20 to May 31, and by 8.6% from May 31 to June 11. Monitoring the upward trend in pork prices in this round is important for understanding its impact on CPI. With pork prices maintaining the average of the first 11 days of June, the year-on-year CPI for June is expected to continue to rise to 0.6%.

Fifth, the month-on-month PPI increased by 0.2% in May, the first positive growth since October 2023. Industries that saw a month-on-month increase included non-ferrous smelting, coal mining, black metallurgy, and electrical machinery. Non-ferrous metals are globally priced and have been relatively strong in recent months. Coal and black metallurgy had seen three consecutive months of negative growth before May, so the positive month-on-month change in May is a positive sign, possibly reflecting the impact of this round of energy conservation and carbon reduction. Industries that saw a month-on-month decrease included building materials, lithium batteries, new energy vehicles, and agricultural and sideline products. Building material prices continued to decline month-on-month, slightly deviating from high-frequency data, with the cement price index showing continuous growth from May to June. Prices in new industries are still awaiting the effects of overall planning and investment guidance policies.

Sixth, the rebound in prices remains one of the most important macroeconomic clues. Since June, the Business Price Index (BPI) has been hovering at a high level, with market expectations for prices fluctuating. However, looking at the 3.1% year-on-year increase in industrial enterprise finished goods inventories in April, it is still in the early stages of inventory replenishment. Based on the empirical relationship between PPI and inventory cycles, there is still significant room for the current price uptrend cycle. The month-on-month slope will depend on demand-side drivers, with the most elastic part of short-term demand being the real estate industry chain. The State Council meeting on June 7 pointed out, "Efforts should be made to promote the implementation and effectiveness of policies that have been introduced, and continue to study and reserve new destocking and market-stabilizing policy measures." Under the continuous accumulation of policies, we expect positive changes in the real estate cycle in the future. We are paying attention to whether a new round of upward cycle in prices in the third quarter can be formed.

In May, CPI increased by 0.3% year-on-year, unchanged from the previous value. PPI decreased by 1.4% year-on-year, higher than the previous value of -2.5%. This result is roughly in line with expectations. In the previous report "Macro Trading Themes Since May," our model predicted CPI and PPI to increase by 0.37% and -1.34% year-on-year, respectively.

In the report "Macro Trading Themes Since May," we pointed out: based on high-frequency simulations, we expect the month-on-month CPI in May to be -0.13%, and year-on-year to be +0.37%. Against the backdrop of rising pork prices, this month-on-month momentum is already higher than the seasonal trend in May in previous years. We expect the month-on-month PPI in May to be +0.28%, corresponding to -1.34% year-on-year. Under this structure, the May Producer Price Index will rise to -0.23%, further rebounding from Q1 and April.

CPI decreased by 0.1% month-on-month. Historically, most Mays have negative month-on-month growth, with an average of -0.2% over the past 10 and 20 years. This year's May month-on-month growth slightly exceeds the seasonal trend. Non-food prices decreased by 0.2% month-on-month, lower than the 0.1% average over the past 10 years, leading to a downward trend. Food prices remained unchanged month-on-month, higher than the average of -1.2% over the past 10 years, leading to an upward trend.

In May, CPI decreased by 0.1% month-on-month, with food CPI remaining unchanged (average of -1.2% over the past 10 years) and non-food CPI decreasing by 0.2% (average of 0.1% over the past 10 years).

Within non-food items, drag factors include travel and oil prices. The National Bureau of Statistics pointed out that post-holiday travel enthusiasm decreased seasonally, with airfares, transportation rental fees, and long-distance bus prices falling by 9.4%, 7.9%, and 2.7% respectively. Due to international oil price fluctuations, domestic gasoline prices decreased by 0.8%.

In terms of food, the prices of fresh fruits, eggs, and pork rose by 3.0%, 2.7%, and 1.1% respectively, while the price of fresh vegetables decreased by 2.5% month-on-month.

Several price signals are worth noting: firstly, pork prices increased by 1.1% month-on-month in May, marking the sixth month of the upward cycle in pork prices; secondly, alcoholic beverage prices decreased by 0.2% month-on-month in May, the lowest since the same period in 2014, possibly related to changes in consumption structure and price expectations. The third is rent, with a month-on-month and year-on-year decrease of -0.1%, showing that the stabilization trend of rent prices still needs to continue brewing; the fourth is transportation, with a month-on-month decrease of -0.9%, significantly higher than the 10-year average of -0.3%, which may be related to the downward trend in car prices under competitive supply.

The bottom of the year-on-year pork price in this round of CPI was -31.8% in November 2023, narrowing to -26.1% in December and -17.3% in January 2024; slight fluctuations in February and March, with year-on-year changes of 0.2% and -2.4% respectively; further increases in April and May to 1.4% and 4.6%.

The month-on-month and year-on-year changes of the rent sub-item in CPI in May were both -0.1%, the same as in April. The year-on-year change in rent accumulation last year was -0.2%, and the pressure in the first 5 months of this year has not deepened, but the improvement is not significant.

The transportation sub-item in CPI decreased by -0.9% in May, higher than the 10-year average of -0.3%. This sub-item has only shown month-on-month growth in January 2023 and February 2024 since 2022.

It is worth noting that after late May, the month-on-month increase in pork prices accelerated. According to observations of the average wholesale price of pork by the Ministry of Agriculture, there was a 9.5% increase from May 20 to May 31, and an 8.6% increase from May 31 to June 11. Paying attention to the impact of the current upward trend in pork prices on CPI, with pork prices maintaining the average of the first 11 days of June, the year-on-year CPI in June will continue to rise to 0.6%.

On April 19, the State Council Information Office held a press conference to introduce the operation of agriculture and rural economy in the first quarter of 2024. The Ministry of Agriculture and Rural Affairs pointed out that the adjustment and optimization of pig production capacity. By the end of March, the national inventory of sows was 39.92 million, decreasing for 9 consecutive months, equivalent to 102.4% of the target holding quantity of 39 million.

As of June 11, the average monthly price of pork by the Ministry of Agriculture was 23.9 yuan/kg, with a daily price of 24.6 yuan/kg on June 11. Assuming the price remains unchanged at 23.9 yuan/kg for the entire month of June, we estimate that the year-on-year CPI in June will be 0.6%.

In May, the PPI increased by 0.2% month-on-month, marking the first month-on-month growth since October 2023. The industries that saw a month-on-month increase were mainly non-ferrous smelting, coal mining, black metallurgy, and electrical machinery. Non-ferrous metals are globally priced, with recent months showing a strong trend; while coal, black metallurgy had been experiencing 3 consecutive months of negative growth, the month-on-month turnaround in May is a positive sign, possibly reflecting the impact of this round of energy conservation and carbon reduction; the industries that saw a month-on-month decrease were mainly building materials, lithium batteries, new energy vehicle manufacturing, and agricultural and sideline products Building material prices are still experiencing negative growth compared to the previous period, showing a slight deviation from high-frequency data. The cement price index has been on the rise from May to June; however, prices in new industries are still awaiting the effects of overall planning and investment guidance policies to take place.

In May, the non-ferrous smelting industry's Producer Price Index (PPI) increased by 3.9% month-on-month, with copper smelting, aluminum smelting, and gold smelting prices rising by 7.0%, 3.4%, and 2.8% respectively. The coal mining industry saw a 0.5% increase month-on-month; the black smelting industry rose by 0.8%; and the electrical machinery and equipment industry increased by 0.7%.

In May, the prices of glass manufacturing and cement manufacturing decreased by 1.2% and 0.8% respectively; while the prices of lithium-ion battery manufacturing and new energy vehicle manufacturing decreased by 0.5% and 0.2% respectively.

There is a discrepancy between cement prices and high-frequency data, with the average month-on-month change in the cement price index being 2.8% in May and 6.5% in June.

The rebound in prices remains one of the most important clues on the macroeconomic front. Since June, the Business Prosperity Index (BPI) has been hovering at a high level, and market expectations for prices have fluctuated. However, looking at the 3.1% year-on-year increase in finished goods inventories of industrial enterprises in April, it is still in the early stage of inventory replenishment. Based on the relationship between PPI and inventory cycles, there is still significant room for this round of price increases. The month-on-month slope will depend on demand-side drivers, with the real estate industry chain being the part with the greatest short-term demand elasticity. On June 7th, the State Council meeting pointed out the need to "focus on promoting the implementation and effectiveness of policies that have been introduced, continue to study and reserve new destocking and market stabilization policy measures." With policies continuously stacking up, we expect positive changes in the real estate cycle to follow. It remains to be seen whether a new round of upward price cycles in the third quarter can form.

Author: Guo Lei (S1220515070001), Source: GF Securities, Original Title: "PPI Sees Month-on-Month Positive Growth for the First Time in Nearly 8 Months"