Tokyo CPI remains boosted by high food and energy prices

Chris Scicluna
Emily Nicol

Asian stocks largely up on Chinese tech reports; JGBs firmer on Tokyo inflation data
Following yesterday’s strong gains on Wall St. (the S&P closed up 2%, the NASDAQ even more than that), it was a positive end to the week for most Asian stock markets. Hong Kong led the way, with the Hang Seng currently up a little more than 2% (albeit still down almost 1% from a week ago), after stronger-than-expected results from Alibaba and Baidu. In Japan, the Topix closed up 0.5% to be up the same amount over the week, buoyed by yesterday’s announcement by PM Kishida that rules will be eased to allow foreign holidaymakers on guided package tours to enter the country from 10 June. US stock futures are currently marginally weaker, but European markets on the whole are higher, with the Stoxx Europe 600 opening up ½%.

In the bond markets, JGBs are largely slightly firmer, with 30Y yields down a couple of bps below 1%, as the advance May Tokyo inflation data came in slightly softer than expected, with the headline and BoJ forecast core measures steady at April’s levels (see detail below). Euro area govvie yields are a couple of bps lower after (typically dovish) Spanish central bank governor Hernandez de Cos emphasised the need for gradual (i.e. 25bp increment hikes), rather than “abrupt movements” (i.e. hikes of 50bps). USTs are steady ahead of today’s US personal spending and associated inflation data.

Tokyo CPI remains boosted by high food and energy prices
After Japanese inflation jumped in April in part due to base effects associated with past government policy initiatives to cut mobile phone tariffs, today’s forward-looking Tokyo CPI numbers suggested that the national measure of headline inflation will remain above the BoJ’s 2% target for the second successive month in May. Admittedly, Tokyo inflation came in a touch softer than expected with the headline CPI rate moving sideways at 2.4%Y/Y after the April number was revised 0.1ppt lower. When excluding fresh food (14.6%Y/Y), the core CPI rate was also slightly lower than expected, unchanged at 1.9%Y/Y. While energy inflation eased for the second successive month, at 22.3%Y/Y it still accounted for more than 40% of total inflation. And with food inflation (up 0.1ppt to 4.3%Y/Y, the highest since 2014) accounting for a further 45% of inflation, the internationally comparable core measure inflation (ex food and energy) stood at just 0.3%Y/Y, suggesting still very subdued underlying price pressures.

Given elevated food and energy prices, our colleagues in Tokyo expect the BoJ’s forecast national measure of core CPI (excluding fresh foods) to edge slightly higher in May to 2.2%Y/Y. But this might well mark the peak, with their expectations for core inflation to move broadly sideways through to the start of 2023. Indeed, BoJ Governor Kuroda today reiterated his view that, in the absence of stronger wage growth, inflation will eventually fall back below target as and when the impact of the recent spike in energy and food prices fades. And so, for now at least, he repeated that the BoJ’s current monetary policy stance remains appropriate.

Spanish retail sales rebound; euro area bank lending data to come
A relatively quiet end to the week for euro area data releases will bring the latest ECB bank lending numbers for April. Given the recent rise in the cost of living, we would expect demand for consumer credit to rise, and mortgage lending is likely to remain firm steady despite recent increases in interest rates on new loans. Meanwhile, data released this morning showed that Spanish retail sales beat expectations at the start of Q2, rising a whopping 5.3%M/M, more than reversing the 3.8%M/M drop in March to be 2.5% above the Q1 average, as sales of non-food products jumped a steep 10.1%M/M. The burgeoning tourism season should provide a further boost over coming months.

Beyond the data in the euro area, ECB Chief Economist Lane is due to participate in a policy panel discussion on ‘new dimensions and frontiers in central banking’. Elsewhere, there are no new data due from the UK.

US spending, goods trade and consumer confidence figures on the docket
A busy end to the week for US releases will bring most notably the monthly spending and income numbers for April. These are likely to report moderate growth in wages that month, with higher interest rates set to boost interest income too. Against this seemingly broadly favourable backdrop, our colleagues in Daiwa America expect spending in nominal terms to have risen again by about 0.7%M/M, although the headline figures will be distorted by higher prices and spending in real terms could be weak. Indeed, our colleagues expect the core PCE deflator to rise 1.4%M/M, so that the annual rate will have eased only 0.3ppt from 5.2%Y/Y in March to 4.9%Y/Y in April. Meanwhile, the advance goods trade numbers are expected to report a narrowing in the trade deficit in April, by $12bn to $115bn, as imports are likely to have fallen back following the near-12% jump in March. Finally, the revised University of Michigan consumer sentiment survey is expected to confirm that the headline confidence index (59.1) fell to its lowest since 2011 as inflation worries continue to undermine sentiment. 

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