Market Economics | Interest Rate Strategy - BNP PARIBAS ...

JGBs: Commodities – A Headwind
• Inflation concerns will mount if the oil price
rises above USD 100/bbl.
• In December, the domestic CGPI rose
1.2% y/y, its third consecutive monthly
advance and its biggest gain since November
2008. Following the rise in raw material prices,
intermediate goods prices have started to
move up.
• It will be some time before final Japanese
inflation moves into positive territory.
However, price declines are drawing to a close;
increases in raw material prices will tend to
spread to other goods.
• Investors will note the halt in price declines
in H2 this year, which will prove to be a
persistent headwind for the bond market.
Higher oil price should lead to inflation concerns
Amongst international commodity prices, investors
should probably focus on crude oil. The WTI futures
price has risen to USD 92/bbl for the first time since
2008, breaking through the USD 90 level, a 50%
retracement of the plunge in prices following the
Lehman shock. In his congressional testimony on 7
January, Fed chairman Bernanke noted that
economic growth would be impeded should petrol
prices rise excessively.
US retail gasoline prices have risen above USD 3 per
gallon for the first time since October 2008. Inflation
worries rapidly took centre stage when the gasoline
price rose above USD 4 in the summer of 2008,
pushing the Fed chairman to pause temporarily in his
drive to cut Fed funds rates. Inflation concerns will
increasingly mount if the oil price rises above the
USD 100 mark.
Input costs for corporations are rising
Investors should pay heed to the wide range of
surging commodity prices that include not just oil but
precious metals and grains. Price increases are not
only the result of expectations of tighter demand
conditions due to the bubble-like economic growth in
emerging economies. Industrialised nations, the US
in particular, are also responsible because of the
asset substitution effect generated by their monetary
easing and currency depreciation. In other words, it
is probable that the surge in commodity prices will be
both broad in range and prolonged in duration.
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15
10
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Chart 1: Japan’s Domestic CGPI (% y/y)
Intermediate goods
Final goods
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05 06 07 08 09 10 11
Source: BNP Paribas
Raw materials
(RHS)
Will commodity price surges spread to final inflation?
The December flash estimate of the corporate goods
price index (CGPI) released by the BoJ on 14
January showed that the domestic CGPI rose
1.2% y/y, its third consecutive monthly advance and
its biggest gain since November 2008. Following the
rise in raw material prices, intermediate goods prices
have started to move up. However, final goods prices
continue to fall in year-on-year terms.
Declining trend in CPI is drawing to a close
Corporate pricing power is decidedly weak. This is
particularly true for manufacturers, who face weak
final demand and intense competition from abroad.
That said, amongst commodities, even grain prices
are advancing. These increases are the result of 1)
growing demand in emerging economies, such as
China, and 2) supply constraints caused by a series
of unseasonable weather events, including droughts
in Russia/Latin America and floods in Australia.
Investors should note that higher raw material input
costs for food easily translate into higher final goods
prices.
The base year for the Japanese CPI will be changed
this August. We expect this to result in approximately
a 0.5pp downward revision to the year-on-year
change in the core CPI. In other words, it will be
some time before final Japanese inflation moves into
positive territory. That said, price declines are
drawing to a close; increases in raw material prices
will tend to spread to other goods. Investors will note
the halt in price declines in H2 this year, which will
prove to be a persistent headwind for the bond
market.
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Koji Shimamoto 20 January 2011
Market Mover, Non-Objective Research Section
48
www.GlobalMarkets.bnpparibas.com