China announced this morning that its factories managed to raise their prices in year-on-year terms for the first time since 2012. The news has lifted global stock markets and the Chinese currency (the latter of which could do with a rest after a bad week).
For a couple of years, China's producer prices had been running at annual declines of 6%, as the country dealt with the after-effects of over-investment at the start of the millennium. Many suspected the figures were understating the problem even then. Given that China’s factories essentially set global prices in so many sectors these days, given that the government's efforts to rein in overcapacity appear to be gaining traction slowly, given that the country is losing its ability to undercut its neighbors on labor costs, and given that oil prices appear to have bottomed (or at least can’t fall by another 50% from this year’s levels) it ought logically to follow that producer prices across the world should be trending higher in due course. As it is, the PPI is still clearly negative in the U.S. (-2% on the year in August), Eurozone and Japan, which account for most of the world’s industrial output.
Higher producer prices should, in turn, feed through into higher investment, as companies gain more confidence that investments will pay for themselves. Higher consumer prices should also follow and then, at last, a return to interest rates more in line with a recovery that is already mature.
It's been a long haul, but the light at the end of the deflation tunnel may not, this time, be an oncoming train. What can possibly go wrong?
Enjoy the weekend, and thank you for your patience with me this week. Alan aims to return on Monday.
• Amazon, VMware Announce Cloud Truce
It seems they’ve always been at war with Eastasia after all. Amazon Web Services and VMware are to join forces in providing services via the Cloud from the middle of next year. The pact announced Thursday by the two companies will allow AWS to offer a more flexible service, in which companies will be able to keep some workloads running in-house while relying on AWS data centers for others. For VMware, the move follows its failure to build an AWS-like Cloud infrastructure of its own, during which time it was often critical of AWS, the world’s largest public Cloud. If you can’t beat em… Fortune
• Softbank Gets Some Saudi Investment Firepower
Saudi Arabia and Japan's SoftBank Group said they will create a tech venture fund pairing Softbank’s expertise in venture capitalism with Saudi Arabia’s desire to diversify its reserve portfolio—and ultimately its economy. Softbank said it expects to pour at least $25 billion into the fund over the next five years, while the Public Investment Fund of Saudi Arabia will “consider” contributing up to $45 billion as lead partner. Softbank said it may also bring in other investors to bring the size of the “Softbank Vision Fund” up to $100 billion. There are few other details available yet, but it seems that the creation of such a well-funded, long-term investor can only be supportive for valuations (think of the recent deal for ARM Holdings). Good news for founders and those groups seeking profitable exits, but it may complicate the lives of private equity firms seeking reasonable value investments. It also suggests Masayoshi Son is planning to stick around a while longer yet, which any future Nikesh Arora should bear in mind in job interviews. Reuters
• Europe’s Free Trade Debacle With Canada
Free trade isn’t just in trouble in North America. A landmark deal between the EU and Canada is on the verge of collapse after the regional parliament of Wallonia threatened to veto it. A motley coalition of anti-globalists has successfully fanned fears that the so-called CETA deal will set a precedent that predatory U.S. companies would exploit, especially with regard to data privacy and investor-state disputes (the farmers have also been vocal, to no-one’s surprise). EU Commission President Jean-Claude Juncker had opened Pandora’s Box by giving in to pressure to allow national and regional governments veto rights over what it negotiated. The normally unflappable Justin Trudeau was moved to ask whom the EU could deal with in future, if not with a country that is arguably closest to it in outlook and income. Politico
• Verizon May Walk From Yahoo Deal
Verizon said that it could walk away from its $4.8 billion deal to buy Yahoo’s internet businesses, considering that the massive data breach that it became aware of after inking the deal may well have a “material” impact on the company’s value. “I think we have a reasonable basis to believe right now that the impact is material and we’re looking to Yahoo to demonstrate to us the full impact,” Verizon’s general counsel Craig Silliman told reporter. Yahoo argues that it wasn’t aware of the scale of the hack that accessed 500 million users’ details when it was selling itself, although it had investigated what it thought were separate, smaller breaches before Verizon made it offer. Fortune
Around the Water Cooler
• SinoChina or ChemChem?
Consolidation in the global chemicals industry took another twist as Reuters’ sources said that China’s two biggest companies in the sector, state-controlled ChemChina and SinoChem, are in talks to merge. Beijing is trying to shore up the balance sheet of two of its most important state-owned enterprises, many of which are struggling to come to terms both with China’s internal transition and with some ill-judged acquisitions at the peak of the commodities cycle. What raises eyebrows is how the news is surfacing before ChemChina has finalized its $43 billion acquisition of Syngenta, as it may yet complicate the antitrust process. Syngenta is due a $3 billion breakup fee if that deal fails. We look forward to the naming of the combined company, anyhow. Reuters
• Samsung Fleshes Out Galaxy Note 7 Impact
Samsung said it expects to lose around another $3 billion in profit over the next six months as a result of its Galaxy Note 7 fiasco. In a stock exchange filing, the Korean company said it would cost around $2.2 billion in operating profit in the fourth quarter of 2016 and another $800 million in the first three months of 2017. Defending market share is part of the cost: the company said it will give U.S. consumers a $100 credit if they exchange their Note 7 for a different Samsung product. In a no doubt welcome contrast to Samsung’s previous releases this week, the market took this one in its stride rising 1.3% in Seoul. Fortune
• A Fare War in Long-Haul Flights is Brewing
There are, of course, always reasons to doubt the ‘end of deflation’ thesis. An escalating fare war over the Atlantic is forcing big airlines to consider chopping prices, redesigning cabins and adding restrictions to win back budget-conscious vacationers. Delta Air Lines President Glen Hauenstein said Thursday he’s reviewing cabin layouts, fares and the rules that come with them for international flights. “The exercise we’re going through is to see what do people really want to buy and what are they paying for it,” Hauenstein said. “It includes all kinds of fare products; it includes cabins we don’t have today.” The big U.S. carriers are having to deal with increasing disruption from budget long-haul airlines, notably Norwegian Air Shuttle and Icelandic carrier Wow Air. Fortune
• Nike Chelsea Barcelona (and Apologies to Woody Allen)
It’s been a while since a financial soccer story slapped us in the face, so here’s one to take you into the weekend: London’s Chelsea FC yesterday confirmed a 10-year sponsorship deal with Nike, unofficially worth 900 million pounds to the club. That’s $1.08 billion at today’s exchange rates but the forward rate written into Nike’s books is anyone’s guess). Spanish media are reporting that Nike is also close to extending its $150 million/year sponsorship deal with FC Barcelona beyond 2018. It’s the latest in a series of transformative rights and sponsorship deals for English soccer clubs in particular. It’s also Nike’s revenge on Adidas for ousting it from its relationship with Manchester United two years ago. You don’t have to be a Chelsea-hater to worry that Nike may have backed the wrong horse: the club went haywire in a 100 different ways last year and is badly in need of more stable leadership if it wants to succeed in a league where wealth is no longer translating directly into achievement. FT, metered access