French inflation declines more than expected, but spending picks up

Chris Scicluna
Emily Nicol

Overview:
The continued negative tone around the US-China trade war – triggered by reports that China will use its dominance of rare earths as a counter to higher US tariffs – and concerns over a slowing global economy saw US stocks post losses yesterday, with the S&P500 closing down 0.8%. But USTs also made gains, with 10Y yields falling about 4bps to around 2.24%, a twenty-month low. So, with little domestic news to drive Asian-Pacific markets, the major equity indices ended the day in the red, with e.g. Japan’s Topix posting the largest drop (0.9%) for three weeks. JGBs also followed Treasuries higher, with 10Y yields declining 2bps to -0.10%, its joint-lowest rate since August 2016. And ahead of next week’s RBA meeting (where a 25bp rate cut is fully priced in), in ACGBs 10Y yields fell 5bps to a new record low of 1.48%, slipping below the RBA’s current cash rate target.

Turning to the day ahead, euro area bonds are likely to follow the global trend higher. With respect to data, this morning’s French flash inflation release, which showed headline CPI falling more than expected to its lowest rate since September 2017, will no doubt raise risks that the flash euro area inflation release (due 4 June) might well fall short of expectations.

Euro area:
While the ECB might well have taken some comfort from yesterday’s European Commission survey, which saw the euro area’s headline economic sentiment index increase for the first month in eleven and showed that consumer price expectations rose to a six-month high, overall the survey continued to signal an economy that was slowing and suffering from subdued inflationary pressures. Certainly, the first of this week’s national flash inflation releases for May from France this morning illustrated that the boost to prices in April was just a temporary factor. In particular, headline inflation (on an EU-harmonised measure) more than reversed the 0.2ppt increase to 1.5%Y/Y in April, falling 0.4ppt to 1.1%Y/Y, its lowest reading since September 2017. On the national measure, the headline rate declined 0.3ppt to 1.0%Y/Y, similarly the lowest rate since 2017. And the detail on the national measure showed a notable easing in services inflation as the Easter-related boost to transport costs fell back, while energy inflation also slipped back. In addition, the decline in non-energy industrial goods prices steepened in May.

In contrast, there was an upside surprise to the latest French consumer spending figures, which showed expenditure on goods rising a stronger than expected 0.8%M/M in April, leaving spending 1.2% higher compared with a year earlier, the strongest pace for thirteen months. So, with consumer confidence also firming, today’s figures suggest that households continued to support GDP growth at the start of the second quarter.

Later this morning will bring German labour market figures for May – which are likely to confirm a further fall in joblessness, to leave the unemployment rate (on the national measure) at a post-reunification low of 4.9%. Italian sentiment indicators from ISTAT are also due and likely to reiterate the message from yesterday’s European Commission survey that reported an improvement in manufacturing sector conditions in May, while consumers were reportedly also more upbeat.

Elsewhere, potential ECB President candidate Olli Rehn is due to speak in London, while in the markets Germany will sell 5Y bonds.

UK:
While focus in the UK will no doubt remain on politics, with an ever-growing list of candidates throwing their hat in the Tory leadership challenge, this morning has already seen the only new data due today in the form of the BRC’s shop price index. And this suggested that retail price inflation jumped in May, with the headline rate up by 0.4ppt to 0.8%Y/Y, the second-highest pace in six years. With food price inflation having eased (down 0.4ppt to 1.8%Y/Y), the increase was more than fully accounted for by higher non-food inflation, which rose by 0.8ppt to 0.2%Y/Y, only the second positive reading since 2011. The BRC attributed this jump in costs to currency depreciation, stockpiling and rising minimum wages, with the heightened uncertainty surrounding the previous end-March Brexit deadline no doubt having played its role over recent months. While the BRC data have recently contrasted with the official ONS retail price deflators, which suggested that price pressures on the High Street have weakened, price pressures will no doubt continue to be impacted significantly by politics, with shifts in sterling and – in the (still unlikely) event of a disorderly no-deal Brexit at end-October – supply shocks capable of having a marked impact.

US:
In the US, it should be a quiet day for top-tier releases with just the Richmond Fed Manufacturing Index due for release. Supply-wise, the US Treasury will sell 2Y floating-rate and 7Y fixed-rate notes.

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