CITIC Securities: It is expected that before the core CPI sees better-than-expected improvement, the bond market may have difficulty pricing in inflation increments.

CITIC Securities pointed out that the impact of the decline in oil prices is gradually becoming apparent, with the month-on-month Producer Price Index (PPI) turning negative in June, but the year-on-year reading continued to rise to +4.1% under the effect of a low base. The performance of PPI is basically in line with market expectations. It is calculated that the oil and chemical related industries had a 0.3 percentage point decrease in the month-on-month PPI in June, but on the other hand, the coal, electronics, and steel industries contributed to some upward growth momentum to offset the decline. The year-on-year Consumer Price Index (CPI) dropped to 1.0% in June, below market consensus, with the core CPI decreasing for two consecutive months. The drop in oil and gold prices may be the core driving factors behind the weak CPI for the month. Among the core CPI components, the performance of tourism, alcohol, and household appliance CPI was weak, while medical services and communication tool CPI showed strength. Looking ahead, the year-on-year PPI in June may have peaked, and the subsequent year-on-year PPI may enter a moderate downward trend, suggesting that attention should be paid to the potential downward risk in industrial enterprise profit growth in the second half of the year. In terms of bond market strategy, the active bond yield of the 10-year government bond rose rapidly by 0.4 basis points after the data was released, possibly reflecting the anticipation of further increase in PPI year-on-year, but the overall adjustment magnitude is limited. Looking ahead to the remaining period of the year, it is expected that before any unexpected improvement in the core CPI, there may be limited incremental pricing of inflation in the bond market.