Chinese Inflation Peaks, Germany and UK ahead of G7

UK Producer Prices set to slip back, German CPI, Italian Q2 GDP, China inflation remains sticky, Japan Q2 GDP (Final). Obama's speech helps Asian risk appetite with bigger than expected growth plan after Bernanke's disappointing speech remained muted on action. Ashraf's Thursday Premium trades had 5 winning trades, while 4 remain in progress. None were losing trades. Stick around for Friday's ideas. Ashraf's DAY 2 in Toronto on Friday.

The decision by the Bank of England to hold rates and keep the asset purchase program unchanged should have been no surprise to our readers given the reasons outlined yesterday. It will however be interesting to see who else joins Adam Posen in the QE corner when the minutes are released in a couple of weeks time.

Today’s release of producer prices for August could well see a month on month decline of input prices of 1.5% bringing the annualised rate down from 18.5% to 16.8%. Output prices which are much lower on an annualised basis are expected to remain unchanged at 5.9%. It would be a mistake to expect inflationary pressures to start to slip back as we look ahead to next weeks CPI numbers.

On the same inflation story yesterday’s press conference by Trichet was about as dovish as it could be as he downgraded the banks growth forecasts for the European economy for 2011 and 2012 as well as highlighting that “downside risks to euro area have intensified”.

Trichet didn’t indicate that a rate cut was on the horizon, but he did indicate that there was little likelihood of any further fiscal tightening in the foreseeable future, given the troubling economic environment. Going as it did hand in hand with the growth downgrade, the outlook for Europe gets darker by the day, something the G7 meeting starting today in Marseille will not be able to solve in a hurry.

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With that in mind today's German CPI for August becomes somewhat of an irrelevance with expectations of it coming in at 2.4%, unchanged from last month and just above the banks target rate.

Given the problems in Italy right now and the political manoeuvring in getting the new austerity budget passed it would be helpful if that latest Q2 GDP numbers gave any indications that the economy is growing at a healthy rate. In an event it is likely that the numbers will show growth of 0.3% for the quarter, unchanged from the previous reading.

In signs that the recent rate tightening cycle in China could well be on pause for now, CPI inflation for August slipped back from 6.5% in July to 6.2%, though food prices continue to be a concern, however producer prices look to be a little bit more sticky rising slightly more than expected to 7.3%, above estimates of 7.2%, but still below July’s 7.5%.

Japan’s Final Q2 GDP continues to show no signs of significant improvement, coming in at -0.5% from 0.3% previously, amidst concerns about the high value of the yen and a slowing global economy. The new Prime Minister has certainly got his work cut out to get the Japanese economy moving again against a backdrop of a country struggling to get back on its feet after the widespread devastation caused by the earthquake and subsequent tsunami.