China's CPI softer, PPI remains in deflation, MSCI announcement due

May CPI and PPI inflation released this morning continued to point to weak domestic demand and subdued price pressures. CPI slowed to 1.2% y/y (market: 1.3%) from 1.5% previously. This was mainly due to lower food prices (32% weight) to 1.6% from 2.7% previously while non-food prices held steady at 1.0% from 0.9% previously, notes Commerzbank. 

PPI fell 4.6% y/y and unchanged from April, representing the 39th consecutive month in deflation territory ie since March 2012. It also reflects declining industrial profits and lack of incentive to increase investment spending near term. The soft inflation print and weak imports released yesterday suggest that China's monetary easing measures to date have yet to lift domestic demand. 

Furthermore, we could yet see more monetary easing and fiscal stimulus but at the same time, they are likely to be at a measured pace in order not to abandon the economic restructuring theme. Elsewhere, watch for MSCI's announcement on whether to include China's A-shares in the MSCI Emerging Market Index, scheduled for 21:30GMT. The impact may be marginal given that it may be priced in and an expected initial weight of 5% of the total market capitalization, which translates to around 1.2% of the MSCI EM index, according to Commerzbank.