I am away from my desk, so for now, just a few charts on the CPI/PPI release. Deflation is deepening, which for PPI is broad-based. Core CPI is more stable, but that's partly due to a rise in "other" prices. Headline CPI is lower on food prices, which have started dropping again.

Recent data show investment fell in 2024 to under 40% for the first time since 2008. On the flip side, consumption edged up, helped by a stabilisation of the savings ratio and a rise in welfare spending. But none of these changes are happening fast enough to boost the cycle.

At a headline level, the industrial PMIs were better in June, but the details were weak, and there was no improvement in the services PMI. The rise in the credit impulse is taking away some of the downside risk for the cycle, but there aren't indications that the cycle is about to really improve.

Profits fell 9% YoY in May, and are now close to 5% of GDP, a level that's only been breached twice in the last 15 years. The driver is more demand- than supply-side, in the sense that the upstream profits, hit by the property downturn, are weakest. But even in machinery, profits aren't rising.

Given regional history, China's transition to exporting more capital goods shouldn't be unexpected. More unusual is that 1) this transition hasn't been accompanied by slower overall export growth, and 2) has occurred at the same time as a sharp slowing of imports. Chart pack attached.

Overall trade trends – strong exports, weak imports, and a big trade surplus – remain in place. But the Trump tariffs are causing big shifts in the structure of exports. Direct shipments to the US have fallen 40% this year, and excluding the pandemic, haven't been this low since 2013.

CPI was surprisingly firm in May, with core continuing to show a reversal from the deflation of 2024. Overall, however, nominal indicators remain very weak. Leads for core have started to deteriorated again, and PPI deflation accelerated in May. The GDP deflator will be negative once again in Q2.

The manufacturing PMI did improve in May, lifted by a bounce in export orders. But there's no sign of a turnaround in the underlying economy, with the construction PMI weak, output prices softening, and business confidence remaining poor.

Official industrial earnings show profitability deteriorating again. A rebound would be first seen in rising prices and improving corporate sentiment, neither of which is yet visible. The weakness is concentrated in heavy industry, but profitability in downstream sectors is only flat-lining.