Tokyo inflation down again

Emily Nicol
Chris Scicluna

With the Ukraine phone saga entering a new chapter and talk that the authorities might be unlikely to extend the waiver permitting US firms to supply Huawei, US stock indices fell back towards the close yesterday (S&P500 down 0.2%), and many markets in the Asia-Pacific region have followed south today. While the latest Tokyo inflation data came in weaker than expected (detail below), Japanese markets have fared worse than most (e.g. the Topix closed down 1.2% to leave a drop of 0.7% over the week as a whole) although the extent of the decline was exaggerated by technical factors (more than half of firms on the index trading ex-dividend). The main indices in Korea and Taiwan were also lower. But China bucked the trend (CSI300 up 0.4%) while US and European stock futures are pointing higher.

In bond markets, USTs are little changed from this time yesterday (10Y yields still close to 1.70%) ahead of today’s US personal spending report which will provide an update on the Fed’s preferred inflation measure. JGBs largely shrugged off the Tokyo CPI report, with 10Y yields trading within yesterday’s range and 2Y yields up about 1bp to -0.33%, their highest level in three days. Euro area govvies are little changed, although this morning’s French spending and flash inflation figures (the latter being the first from the euro area for September) all surprised on the downside (more on this below too). Meanwhile, sterling is weaker following this morning comments by the usually hawkish MPC member Michael Saunders who stated that it was plausible that the BoE would need to cut rates rather than raise them even with a Brexit deal. That accords with our own view – indeed, we currently forecast a 25bps cut in Bank Rate in May.

With Governor Kuroda having emphasised that the BoJ is closely watching the inflation outlook, today’s Tokyo CPI figures for September provided a reminder that things are currently heading in the wrong direction, offering further support for the case for easing at the next Board meeting at end-October. In particular, consumer prices fell 0.1%M/M in September – the first monthly decline in four – to leave the annual CPI rate down 0.2ppt to 0.4%Y/Y, a sixteen-month low. The BoJ’s forecast CPI rate (excluding fresh foods) was also 0.2ppt lower at 0.5%Y/Y, also the weakest since April 2018. When also excluding energy prices, the BoJ’s preferred core measure fell a more modest 0.1ppt to 0.6%Y/Y, nevertheless the lowest rate so far this year.

While a smaller pace of annual decline in fresh food prices provided a modest upward impulse, energy inflation declined 2ppts in September to -0.9%Y/Y, the first annual fall since April 2017 on the back of a notable drop in electricity prices that month. Despite the start of the Rugby World Cup this month, hotel charges remained relatively subdued (+0.9%Y/Y), while package tour prices (-2.8%Y/Y) fell for the first time for almost two years. Clothing prices also fell in September to knock 0.1ppt off headline CPI too.

Looking ahead, despite the recent jump in the oil price, we expect energy inflation to provide a greater drag on annual inflation in the fourth quarter. So, while the consumption tax hike will add about 1.1ppt to the unadjusted national rate from October, excluding that effect a further modest decline in the BoJ forecast measure of core CPI over coming months seems highly likely. Indeed, excluding the impact of the tax hike, the national BoJ forecast measure could well fall to just 0.1%Y/Y in October, when the Government’s free early years education policy kicks in. And with GDP set to shift into reverse in the fourth quarter, and growth likely to be subdued thereafter, there seems no reason to expect inflation to be anything other than very subdued for the foreseeable future.

Euro area:
It will be a busy end to the week for euro area economic data releases, with perhaps most noteworthy the European Commission’s September business and consumer surveys, which arguably offer the most comprehensive guide to economic activity in the euro area. While the flash consumer confidence survey reversed the decline seen in August, the flash PMIs earlier this week suggest that business confidence took a notable turn for the worse in September. So, the headline economic sentiment indicator is likely to weaken in September, to leave the quarterly average at its lowest since Q215. Italy’s ISTAT business and consumer sentiment surveys are also due.

This morning’s French economic data were, on the whole, weaker than expected. Most notably perhaps, the first data for inflation in September from any member state delivered a downside surprise, with the CPI on the harmonised EU measure dropping 0.2ppt to 1.1%Y/Y, which matches the lowest rate of the past two years. The data on the national measure, however, revealed that the downward pressure came from food (down 1.0ppt to 2.1%Y/Y) and energy (down 0.6ppt to 0.2%Y/Y). In contrast, core components on that basis were higher, with inflation of manufactured products up 0.2ppt to (an admittedly still very weak) -0.7%Y/Y and services up by the same margin to 1.3%Y/Y.

Household consumption on goods in August also surprised on the downside, being merely unchanged after rising 0.4%M/M the prior month. A further significant increase in spending on durable goods (1.6%M/M following a gain of 1.7%M/M in July) thanks not least to strength in the new car category, as well as clothing (up 1.6%M/M following a steeper dip previously) was offset by lower spending on food and energy. The sideways move in overall spending in August left it down 0.4%Y/Y but still up a steady 0.3%3M/3M. The moderately positive trend should be broadly maintained going forward, not least with consumer confidence up to its highest since early last year and after Macron’s draft budget for 2020 yesterday confirmed plans for cuts in income tax for low earners and other sweeteners for more cash-constrained individuals.

Elsewhere, ECB Chief Economist Lane is due to speak in New York, while Governing Council members de Guindos, Knot and Hernández de Cos will speak at the ESRB conference in Frankfurt.

After a depressing week for UK politics, the end of the week will see UK Brexit Secretary Barclay meet EU Chief Negotiator Barnier in Brussels. Perhaps inevitably, we do not expect anything substantive to emerge.

But while persistent political uncertainty will be damaging to the UK economy, the latest GfK consumer survey indicated a surprising pickup in confidence this month. In particular, the headline index rose 2pts in September to -12, nevertheless still comfortably within the recent weak range, 3pts lower than a year earlier and 11pts lower than the pre-referendum level. But while there were modest improvements across the survey components, they still continued to suggest that consumers feel less than positive about the current and future economic situation – indeed the survey’s index for economic conditions over the coming twelve months was still one of the lowest since the Global Financial Crisis. While the headline index remains some off the record lows seen during this period, overall today’s survey suggests little substantive improvement in household confidence. And with the component measuring consumers’ willingness to make major purchases still below its level a year ago, we expect consumption growth to be more subdued the longer political uncertainty persists.

In the US, this afternoon will bring the release of preliminary durable goods orders data for August, along with personal income and spending numbers for the same month, including the Fed’s preferred inflation measure, the core PCE deflator. On an annual basis, this is expected to rise 0.2ppt to 1.8%Y/Y, which would be the highest since December.


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