UK inflation starting to slide

Emily Nicol
Chris Scicluna

Overview:
With oil prices continuing to slide – Brent for June delivery briefly slipped below $16bbl earlier this morning, more than $10 below its price early yesterday – investors can’t ignore the weakness of economic demand resulting from the coronavirus. With that in mind, Japanese stock markets opened lower today and failed to regain momentum (the Topix closed down 0.6%). Elsewhere, however, cautious optimism that the spread of the covid-19 in the worst affected countries has been contained by lockdown measures seemed to win out (the number of Italian patients declined for the first time while the number of new infections in Germany fell to its lowest since March), with gains of up to 1.0% recorded in the main indices in China, Korea and Hong Kong. European markets have also on average opened about 1.0% higher, while futures point to a better opening in the US today too.

In bonds, the improved risk appetite has largely been reflected in the UST market (e.g. 10Y yields have edged back up to 0.59%, still however a few bps down on this tine yesterday). But the weaker showing in Japanese stocks and a slightly stronger yen gave support to cash JGBs, which saw 10Y yields fall a couple of bps to -0.001%, the lowest in more than a fortnight, and super-longs outperform after a decent 20Y auction. And cash ACGBs ignored a surge in Aussie retail sales as consumers stockpiled essentials last month (see below).

In the euro area, after yesterday’s sell-off, BTPs have outperformed somewhat so far (10Y yields little changed from yesterday’s close near 2.15%) while yields on Bunds have picked up across a steeper curve. But this time around, Spain and Portugal are underperforming, with 10Y yields up about 10bps as investors seemingly have dim hopes for EU leaders to agree any meaningful new financial support for the recovery at tomorrow’s teleconference. Gilts are a touch weaker too, as UK inflation fell in line with expectations (see below for more on this too).

UK:
As expected, falling oil prices and the impact of Covid-19 on spending on the High Street and social activities weighed on UK inflation last month. In line with the consensus forecast, the annual CPI rate fell 0.2ppt to a three-month low of 1.5%Y/Y. Prices of petrol (to the lowest level in thirteen months), clothing, and hotels made significant negative contributions, while higher air fares and phone charges provided some modest offset.

Overall, despite sterling weakness, inflation of non-energy industrial goods fell 0.3ppt to an eleven-month low of 0.2%Y/Y. But services inflation picked up, rising 0.1ppt to a five-month high of 2.6%Y/Y. So, core inflation fell just 0.1ppt to 1.6%Y/Y. In terms of the non-core items, the drop in energy inflation, down 2.8ppts to 0.8%Y/Y, was partly offset by higher inflation of food, beverages and tobacco (up 0.4ppt to 1.4%Y/Y) reflecting higher duty on cigarettes etc. following the March Budget and as consumers started stockpile for the lockdown.

Looking ahead, the further drop in oil prices, together with lower regulated energy prices, will push headline inflation significantly lower over coming months. Indeed, assuming that data collection difficulties do not significantly impede the production of the figures, from April we expect headline inflation to fall below 1.0%Y/Y, requiring an explanatory letter from the BoE Governor to the Chancellor. And we expect it to fall further, to 0.5%Y/Y or less, during the summer.

Australia:
A new flash estimate of Aussie retail sales figures published by the ABS overnight revealed a record surge in spending in March, as panic buying saw the value of total retail sales rise by 8.2%M/M in March, surpassing the previous peak monthly growth ahead of the consumption tax increase in 2000. That left sales up 9.8%Y/Y, similarly the strongest annual rate since mid-2000.

Within the detail, food retailing saw sales surge 23½%M/M as turnover of toilet paper, flour, pasta and rice doubled from February. And expenditure on canned foods, medical and cleaning products was up by more than 50%. Electrical store sales were also boosted by businesses preparing for home working. In contrast, sales at cafes, restaurants, clothing and department stores were all considerably weaker.

Overall, the very strong performance in March left the value of retail sales up more than 2 ½%Q/Q in Q1, the strongest quarterly increase since Q307. ABS suggested that supermarket sales had started to level off at the end of the month and we would expect underlying expenditure to remain extremely weak over coming months, not least reflecting the marked deterioration in employment prospects. Indeed, the coronavirus crisis unsurprisingly had a significantly negative impact on new internet job advertisements in March, down more than 22%M/M, more than double the rate of the previous steepest decline during the global financial crisis, to a series low.

Euro area:
Today will bring the Commission’s flash estimate of euro area consumer confidence in April. The index posted a substantive 5pt decline in March to -11.6, which was still nevertheless only the lowest reading since 2014. So, today’s figure seems bound to report a marked deterioration in consumer sentiment at the start of the second quarter as the impact of the coronavirus and associated lockdowns across various member states took their toll. Meanwhile, after the French labour minister at the start of the week noted that there are currently 9.6mn workers in temporary unemployment, today will also bring the weekly update on French labour market conditions.

US:
It should be a relatively uneventful day for US economic data with just the FHFA house price indices for February due.

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