Tokyo inflation beats expectations in April

Chris Scicluna
Emily Nicol

Asian stocks mostly down after steep US declines; Japan bucks trend after holidays
While US stocks were hammered yesterday (the S&P500 fell more than 3½%, the NASDAQ about 5%), Asian markets have largely followed suit, with the Hang Seng down more than 3½% as China’s leaders appeared to double-down on Xi’s zero-Covid strategy; Japan bucked the trend, with the TOPIX up 0.9% after reopening from the Golden Week holidays; US futures are currently little changed but European equities have opened lower.

USTs a touch weaker again after yesterday’s big losses; JGB yields up as Tokyo inflation exceeds expectations; but Gilts’ post-MPC rally continues
After yesterday’s sharp sell-off, UST yields are up a couple of bps across the curve, albeit not quite reaching yesterday’s intra-day peaks (2Y yields currently about 2.72%, 10Y about 3.06%); Aussie govvies unsurprisingly followed USTs lower; 10Y JGB yields rose about 1½bps as Tokyo inflation data surprised on the upside; but Gilts have followed yesterday’s post-MPC rally in the wake of the BoE’s dovish hike with yields down another 1-2bps across the curve (2Y yields at 1.50%, 10Y yields 1.94%) and euro area govvies have followed suit.

Tokyo inflation beats expectations in April with headline rate at 3-decade high
While Tokyo CPI inflation was widely expected to have jumped in April as the impact of past government initiatives dropped out of the annual calculation, today’s figures beat expectations. The headline CPI rate leapt 1.2ppts to 2.5%Y/Y, the highest for three decades, as services inflation jumped 1.6ppts to 0.1%Y/Y to account for roughly three-quarters of the increase. This principally reflected a markedly softer pace of annual decline in mobile phone tariffs (up about 30ppts to -22.5%Y/Y), with recreational services inflation also boosted by the lifting of pandemic restrictions. Non-durable goods inflation (7.0%Y/Y) was the highest for more than four decades, reflecting global cost pressures. Like-wise food (4.3%Y/Y) also provided a boost. And while energy inflation eased slightly (down 2ppt) at 24.6%Y/Y it still accounted for more than 1ppt of headline inflation. So, the internationally comparable core measure of Tokyo inflation (excluding food and energy) was a more subdued 0.3%Y/Y, nevertheless the highest since January 2020.

German IP slumps in March on worsened supply-chain challenges
German industrial production in March slumped 3.9%M/M, three times the consensus decline on the Bloomberg survey and the sharpest since the onset of the pandemic, albeit foreshadowed by yesterday’s very weak turnover data. The drop left it about 7½% below the pre-pandemic level. Constrained by supply-chain challenges aggravated by the war in Ukraine, manufacturing output dropped a steeper 4.6%M/M to be some 10% below the pre-pandemic level, with widespread weakness: capital goods -6.6%M/M, cars -14.0%M/M, intermediate goods -3.8%M/M and consumer goods -1.5%M/M. Despite the steep fall in March, German manufacturing output still rose 0.4%M/M in Q1. And contrasting the factory sector, construction output rose 1.1%M/M in March to be up a firm 4.0%Q/Q in Q1. Looking ahead, however, the weak end to Q1 is likely to be followed by a decline in German IP in Q2.

Spanish IP, Italian retail sales and commentary from ECB hawks to come
Spanish IP and Italian retail sales data for March are due later today. Spanish IP is expected to fall about ½%M/M but will be up in Q1 as a whole and still above the pre-pandemic level. And like the euro area retail sales numbers published earlier this week, Italian sales are also likely to have fallen back in March and also dropped over Q1 as a whole. Meanwhile, after yesterday brought some commentary from a few of the Governing Council’s doves, whose opposition to a rate hike in July nevertheless seems to be fading, today’s ECB commentary will come from a number of hawks (Nagel, Elderson and Rehn, who yesterday called for successive rate hikes in July and September) as well as a bellwether (Villeroy).

Post-MPC BoE commentary and construction survey on UK agenda
In the UK, after yesterday’s relatively dovish hike from the BoE, a number of MPC members will speak publicly, including external members Mann (a hawk), Tenreyro (often a dove), and Chief Economist Huw Pill (likely to reflect the overall view on the Committee). Data-wise, unlike yesterday’s equivalent euro area indices, the UK construction PMIs are likely to point to ongoing solid expansion in the sector, although optimism about the outlook might well be further tarnished by ongoing supply-side challenges, substantial cost burdens and potentially softer demand.

US labour market report will be today’s principal focus
The main data focus today will be the US labour market report for April – Daiwa America’s Mike Moran forecasts a pickup in nonfarm payroll growth to 500k (from 431k in March and above the BBG consensus of 380k, but a touch below the 12-month average), and a further drop of 0.1ppt in the unemployment rate to 3.5%. Average hourly labour earnings is expected to remain steady at 0.4%M/M, in line with the average of the past six months. March consumer credit are also due.

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