Do Pork Prices Point To A Far East Recovery?

In a new report, Credit Suisse analyst Weishen Deng discusses the importance of pork prices on the economic outlook for China. Historically, pork prices and CPI inflation have had a relatively high correlation in China, but Deng believes that this is not one of those times.

Pork prices in China have recently soared 60 percent higher than they were just one year ago. However, Deng does not expect that trend to continue and predicts that pork prices will moderate for the rest of the year.

In addition, he notes that past correlation between pork prices and Chinese inflation have been amplified by domestic demand and M2 growth, but that isn’t the case this time.

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If surging pork prices are an indicator that a spike in CPI is coming in China, it could pose a threat to the nation’s monetary easing policies. While Deng admits that there is upside risk to Credit Suisse’s 1.4 percent 2016 CPI forecast, he does not believe that it will force the government to re-think its monetary easing.

“Higher CPI prints may add incentive for the PBoC to prefer selective easing over broad based easing, and to prefer liquidity management tools (e.g. RRR) over price tools (e.g. interest cut),” he explains.

So far this year, the iShares FTSE/Xinhua China 25 Index (ETF) FXI is down 7.2 percent. The iPath Bloomberg Livestock Total Return Sub-Index ETN COW is up 1.9 percent.

Disclosure: the author holds no position in the stocks mentioned.