Japanese inflation well off track

Chris Scicluna
Emily Nicol

Ahead of today’s long-awaited Jackson Hole speech from Jay Powell, markets might have been excused for treading water, particularly given the Fed Chair’s rather erratic track record on communication since taking over from Yellen. But for fear of triggering an unwanted tightening of financial conditions, Powell might seem unlikely to say anything that would contradict significantly current market expectations of further easing to come over the coming year. While he might repeat his "mid-cycle adjustment" language used following the last Fed policy meeting, he’ll no doubt talk up further the downside risks from trade (given escalation of the tariff war since the last FOMC) and uncertainty about outlook for investment and manufacturing. And he’ll surely repeat that the Fed will continue to act to sustain the expansion.

So, while the S&P500 closed yesterday effectively unchanged on the day, most Asian bourses have chalked up gains today with US futures also pointing higher for the day ahead. In Japan, where the latest inflation data provided another damp squib (detail below), the Topix closed up a relatively modest 0.3%, but the rise on China’s CSI300 was larger at 0.7% as the offshore yuan depreciated back to 7.1/$.

In bond markets, having been buffeted yesterday by commentary from FOMC members Harker and George – the views of both nevertheless long known to be at the hawkish end of the spectrum – UST yields edged up a touch further in Asian time, e.g. with 10Y yields reaching 1.64% for the first time in more than a week while the slope between 2Y and 10Y is effectively flat again. Yields on JGBs are thus perhaps inevitably a touch higher today too (10Y yields at -0.24%) while euro area govvies have opened weaker having made losses yesterday in the wake of some slightly improved flash PMIs.

Meanwhile, having appreciated more than a cent against the dollar yesterday in the wake of some optimistic (but ultimately meaningless) comments on Brexit from Angela Merkel, sterling has eased back only slightly (still a touch above $1.22). BoE Governor Carney is also among the key speakers at Jackson Hole today, so his lunchtime (local time) address might also have a bearing on markets – he’ll no doubt be relieved to be a long way away from the political madness in the UK. RBA Governor Lowe, meanwhile, will speak at Jackson Hole tomorrow. Last and least, the G7 summit in Biarritz might provide some less edifying distraction to the more cerebral goings on today at the Fed’s symposium.

There were no major surprises from Japan’s inflation figures overnight, which continued to underscore that underlying price pressures remain very subdued and the achievement of the BoJ’s 2% inflation target remains a long way off. Admittedly, consumer prices posted a modest rise in July (0.1%M/M) for the first month in three. Nevertheless, this left the annual rate of headline inflation declining a slightly larger-than-expected 0.2ppt to ½%Y/Y. But this principally reflected a drop in fresh food prices that month. So, when stripping out such items, the BoJ’s forecast measure of core inflation was unchanged at 0.6%Y/Y, albeit the lowest rate for two years. Moreover, when also excluding energy prices, the BoJ’s new preferred core CPI edged slightly higher, by 0.1ppt to 0.6%Y/Y. But while the core-core measure (excluding all food and energy) – which aligns most closely with figures reported by other major economies – was also nudged higher, at just 0.4%Y/Y it suggests that underlying inflation in Japan remains well below levels prevailing among its peers.

Within the detail, there was a somewhat encouraging increase in non-energy industrial goods inflation, with the 0.3ppt rise to 0.7%Y/Y the highest for more than three years. But this largely reflected a pickup in the price of mobile phone handsets, which has seen significant volatility over recent months – i.e. in July prices were up 0.2%Y/Y following a decline of more than 9%Y/Y in June. And with mobile phone charges remaining a modest drag, while the increase in hotel prices also moderated, services inflation edged lower in July to just 0.3%Y/Y. Energy inflation also eased further in July, with the 0.6%Y/Y increase half the pace seen in June and the softest since the start of 2017.

Looking ahead, energy prices are likely to subtract from annual rates over the near term. So, a further modest decline in the BoJ’s forecast measure of core CPI over coming months seems highly likely. And despite the anticipated step-up later this year on the back of the consumption tax hike – most of which will be offset by the abolition of certain public school fees – with GDP set to shift into reverse after the tax hike and risks to the growth outlook skewed firmly to the downside, we expect underlying inflationary pressures to remain very subdued for the foreseeable future. So, with the BoJ having stated at its last policy-setting meeting that it “will not hesitate to take additional easing measures if there is a greater possibility that the momentum to achieving the price stability target will be lost”, and 10Y yields below the bottom of Kuroda’s target range, further policy action as soon as next month might seem likely.

With no European data of note due today, attention will be on Carney’s speech at the Jackson Hole Symposium. But following UK PM Johnson’s visits to German Chancellor Merkel and French President Macron earlier this week which unsurprisingly delivered little constructive progress on Brexit – Merkel and Macron politely but firmly placed the ball in the court of the UK to find the alternative to the backstop that might maintain an open border on the island of Ireland if and when the UK leaves the Customs Union and Single Market – focus will also be on the G7 summit in Biarritz.

In the US, the main event will clearly be the aforementioned Jackson Hole symposium, with Fed Chair Powell’s speech at 8am (local time) to be analysed closely. Data-wise, today’s new home sales numbers for July will provide a footnote to the day’s events.

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