Japanese household inflation expectations revised higher

Chris Scicluna
Emily Nicol

Japanese household medium-term inflation expectations revised sharply higher
After Friday’s Tankan survey reported a significant increase in Japanese business inflation expectations – with firms now expecting inflation to be broadly in line with the BoJ’s 2% target over the medium term for the first time on the series dating back to 2014 – today’s survey of public opinion from the Bank of Japan reported a significant increase in consumer inflation expectations. In particular, the median household forecast of inflation five years ahead was revised up 2ppts from March to a whopping 5.0%Y/Y, the highest since September 2008, with more than one third of respondents expecting prices to rise “significantly”. The median household also expects inflation to be 5.0%Y/Y this time next year.

Household income expectations still downbeat; survey would justify upwards revision to BoJ’s own inflation forecasts next month and could even justify a policy shift
At the same time, however, a smaller share of households – just 8.5% (down from 9.8% in the survey three months ago) – expects their income to rise over the coming year. Moreover, a net balance of more than 55% of households judge that economic conditions have deteriorated over the past year, and a net balance of close to 20% expect further deterioration over the coming twelve months. With more than half of respondents also judging that the BoJ’s public explanation of its policy is unclear, the survey helps to explain why 46% of respondents to a Nikkei survey last month want the BoJ to end its current policy stance, with only 36% in favour of the status quo. Moreover, the significant upwards revision to the survey measures of both household and business medium-term inflation expectations provide the BoJ with significant cover to raise its own medium-term inflation projections closer to target – a step that could justify an exit from the current policy settings should Kuroda wish to do so.

German factory orders avoid fourth successive drop in May; manufacturing turnover up pointing to a rebound in IP in tomorrow’s data
This morning’s German factory orders data marginally beat expectations, avoiding a fourth successive monthly drop in May. However, while the extent of the decline in April was also smaller than previously thought at 1.8%M/M, German factory orders were still effectively flat in May with growth of just 0.1%M/M. That left them down 3.1%Y/Y albeit still 4.1% above the pre-pandemic level in February 2020. Moreover, excluding bulk orders, orders did fall for a fourth successive month in May, by 0.9%M/M. And the average level of new orders in the first two months of Q2 was some 4.9% below the average in Q1, highlighting a marked weakening of demand for German goods this quarter.

Unlike recent months, the weakness of orders in May came from domestic orders, which fell 1.5%M/M in overall terms and a steep 5.1%M/M excluding bulk orders. New orders from within the euro area fell 2.4%M/M but other foreign orders rose 1.3%M/M. By type of good, further declines in orders for intermediate and consumer goods in May was offset by a pickup in new orders for capital goods (including motor vehicles). Slightly more encouraging, manufacturing turnover rose for a second month in May, up 3.2%M/M following growth of 0.6%M/M, to suggest upside risks to the consensus forecast (currently 0.4%M/M) for tomorrow’s industrial production data for that month.

Euro area retail sales figures likely to remain subdued in May suggestive of drop in Q2
Looking ahead, euro area retail sales figures for May are likely to report moderate growth (0.5%M/M) insufficient to reverse the decline of 1.3%M/M in April and so will suggest the likelihood of a drop in spending on goods in Q2. In addition, the euro area construction PMIs for June will likely signal a pause in growth in the sector as a whole at the end of Q2.

Services survey and Fed minutes today’s focus in the US
The services ISM survey is expected to signal a further loss of momentum in the sector amid concerns about aggressive Fed tightening and recession risks. The BBG consensus forecast is for a third successive drop in the headline index, of 1.9pts to 54.0, which would be the weakest since the first wave of Covid-19 in the first half of 2020. JOLTS job openings data for May will also be watched given the importance attached by the Fed to reducing the current tightness of the labour matched – the expectation is for a drop of some 500k to 10900k, which would be the lowest since October but still almost 5mn above the number of unemployed workers. This evening brings the minutes from the FOMC’s 14-15 June meeting, when the target range for the Fed Funds Rate was raised by 75bps (compared to the 50bps originally flagged by Powell) and signalled the likelihood of a large hike at its meeting at the end of this month too. The Fed’s Vice Chair John Williams is also scheduled to speak today.

Politics to continue to dominate in the UK, with a majority of Brits wanting Johnson to quit; construction PMIs to offer little distraction on the economic front
After yesterday’s resignation of two senior cabinet ministers – including Chancellor Sunak, whose departure raises the possibility of a looser fiscal policy over the near term – over issues related to the PM’s basic integrity and competence, and a couple of further junior resignations this morning, politics will continue to dominate in the UK. Johnson is set to face MPs at PMQs at lunchtime, after a snap YouGov poll suggested that two-thirds of Brits now want Boris Johnson to resign. While the PM might just about make it through the summer, he seems highly unlikely to see out the year in Downing Street, with changes to Conservative leadership rules likely to be instigated if he doesn’t resign. And those increased expectations of Johnson’s departure should give support to sterling. Meanwhile, on the economic data front, the construction PMIs are expected to signal continued expansion.

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