Inflation in focus

Emily Nicol
Chris Scicluna

Overview:
While the S&P500 yesterday reached a new closing high, the market mood in Asia soured today. The trigger was the leap in the number of new coronavirus cases in Hubei. Following the use of a new methodology, the province reported almost 15k new cases – more than ten times the number reported yesterday – and a more than doubling of the number of fatalities (to 242). The economic consequences of the epidemic was illustrated by some dire Chinese car sales figures too – passenger vehicle sales to dealerships fell in January by 20.2%Y/Y, the biggest drop since 2012, tallying with earlier predictions by the China Passenger Car Association that retail car sales in China would fall 25-30%Y/Y over January and February combined.

Perhaps unsurprisingly therefore, Chinese stocks ended their run of seven consecutive days of gains, with the CSI300 eventually closing down 0.6% and the yuan depreciating through 6.98/$. While most other major indices in the region are also lower, the declines have been relatively moderate. For example, the TOPIX closed down 0.3% as the yen reversed yesterday’s depreciation and as Koichi Hamada, one of the originators of Abenomics, stated that the Government should provide additional fiscal stimulus (and the BoJ should refrain from further action) if the coronavirus hit Japan’s economy in a significant way. In the bond markets, meanwhile, USTs reversed their losses of yesterday, with 10Y yields down 5bps in Asian time. JGBs, however, are little changed from this time yesterday, having initially opened lower.

Japan:
Ahead of next week’s Japanese CPI data for January, the overnight release of the latest producer price inflation figures provided an insight into pipeline price pressures at the start of the year. These came in a touch firmer than expected, with factory-gate prices rising 0.2%M/M in January, to leave the annual goods PPI rate up 0.8ppt to 1.7%Y/Y, a fourteen-month high. Of course, when excluding the effects of the consumption tax hike, the headline rate was less impressive at 0.1%Y/Y, nevertheless the first positive reading since May.

Looking at the detail, the upwards pressure principally reflected higher energy inflation – prices of petroleum and coal products rised 2.9%M/M to leave the annual rate surging 8ppts to 9.2%Y/Y (7.3%Y/Y excluding the consumption tax effect), the highest since November 2018. Prices of chemical products and nonferrous metals also edged higher. And overall, prices of raw materials jumped at the start of the year, to leave the annual rate up 7.1ppts to 0.8%Y/Y. But this improvement largely reflected base effects, which will reverse over the near term.

Nevertheless, there were somewhat encouraging signs with respect to final consumer goods price inflation in January, which increased 1.1ppts to 0.1%Y/Y, the first positive reading since April, as the drag from import prices moderated considerably (-1.8%Y/Y) and domestic prices rose at the strongest annual rate since October 2018 (0.8%Y/Y).

Overall, however, today’s release suggests that underlying pipeline pressures remain subdued. And with energy and commodity prices having fallen back since the start of the year on the back of concerns about the impact of the coronavirus on China’s economic activity, such items seem bound to become more of a drag on the headline rate over coming months. This of course will further weigh on the BoJ’s forecast measure of core CPI, which is expected to have already taken a step down at the start of the year back close to just ½%Y/Y (0.2%Y/Y when excluding the effects of the consumption tax hike and government education policies).

Euro area:
There were no surprises whatsoever from the final German consumer price inflation data for January. These figures confirmed the flash estimate of inflation on the EU-harmonised measure, up 0.1ppt to a nine-month high of 1.6%Y/Y. That, however, principally reflected higher petrol inflation, up almost 10ppts to 5.2%Y/Y. And with non-energy and services inflation softer, underlying inflation looks to have weakened a touch. And assuming oil prices remain close to current levels (Brent is current close to $55.4 having peaked at $71.75 early in January), headline German (and euro area) seems bound to slip back over the near term. (The final estimate of euro area inflation in January is not due until a week tomorrow.)

UK:
In line with the more positive tone of various sentiment indicators since the start of the year, the overnight release of the RICS residential market survey pointed to further improvement in the housing market at the start of the year. In particular, the headline house price index surged in January by 17pts to +17, the first positive balance since July 2018 and the highest since May 2017. While the improvement was widespread, the most significant increase was seen in London, where the house price balance jumped 37pts to +28, the highest since August 2015, while the house price balance in the South East (up 28pts) returned to positive territory for the first time since mid-2017.

Other details of today’s report were more encouraging for the near-term housing market outlook too, with a notable increase in the survey measure of supply of properties on the market – reportedly the most since the summer of 2013 – accompanied by higher buyer enquiries and the most agreed sales since April 2014. And so, surveyors were more optimistic about near-term sales expectations too, with the relevant index the strongest since 2015, while the outlook for prices over the near term and the coming twelve months were the firmest since the start of 2016.

US:
Today will bring the first top-tier US release of the week, with January consumer price inflation figures expected to show increases of 0.2%M/M in both the headline and core measures. As such, the annual headline CPI rate is forecast to have shifted slightly higher by 0.2ppt to a fifteen-month high of 2.5%Y/Y, on the back of energy price movements. Core inflation, however, is expected to move shifted slightly lower by 0.1ppt to 2.2%Y/Y, consistent with the core PCE deflator remaining firmly below the Fed’s 2.0% target.

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