Japanese tertiary firmer than expected in August

Chris Scicluna
Emily Nicol

Gilts open higher ahead of further UK government package of tax hike and spending cut measures
Gilts have rallied at market opening – with yields down significantly more than 20bps across the curve – ahead of the announcement by new Chancellor Jeremy Hunt of further plans for fiscal tightening. The measures will reportedly initially be announced at 11am BST, before being presented to the House of Commons at 15.30 BST. The measures were hastily put together over the weekend after the Friday afternoon press conference by hapless Prime Minister Liz Truss – during which she announced a U-turn on her plans for corporation tax, which would have cost the taxpayer more than £12bn in the coming fiscal year and around £18.7bn by FY26/7 – clearly failed to assuage market concerns. So, while Hunt was himself only appointed as Chancellor at the end of last week, expect cancellation of even more of Truss’s tax plans today, including the decision to bring forward a 1ppt cut in the main income tax rate to April (which would have cost a little more than £5bn), and perhaps also more substance on new plans for cuts to public expenditure too. While the measures might well help to halt the rot in the Gilt market, they will further highlight that Truss’s authority is completely in tatters, and will raise expectations that she’ll be gone from Downing Street before long.

Japanese tertiary firmer than expected in August, while IP on track for solid rebound in Q3
Japan’s tertiary activity figures reported stronger-than-expected growth in August, up 0.7%M/M, reflecting a notable increase in medical care services (3.2%M/M) and improvements in wholesale trade (2.8%M/M). But this followed two months of declines in overall tertiary activity to leave it trending merely flat compared with the Q2 average. And despite a further improvement in hospitality – accommodation services (up 11%M/M) and eating out (up 3½%M/M) – activity was still well down on the Q2 average. But manufacturing output rose a stronger-than-previously-estimated 3.4%M/M in August, to leave it trending in the first two months of Q3 almost 6% higher compared with Q2 and suggesting a solid contribution to GDP growth last quarter. Looking ahead, September’s goods trade report (Thursday) will provide greater insight in net trade over the past quarter. Meanwhile, Friday’s CPI release is expected to show that headline inflation eased back slightly in September, by 0.1ppt to 2.9%Y/Y on the back of softer energy and fresh food prices. Indeed, when excluding both, core inflation is forecast to have risen 0.2ppts to 1.8%Y/Y.

Euro area final CPI inflation might bring a slight downwards revision, but still remain at a record high
It should be a relatively quiet week ahead for top-tier euro area releases, with the final inflation figures for the region on Wednesday arguably of most interest. The flash estimates showed headline HICP inflation jumping to double-digits for the first time, up 0.9ppt to 10.0%Y/Y, with the core rate up 0.5ppt to 4.8%Y/Y. Depending on the latest Italian numbers (due later today), there is a risk that the headline rate will be revised a touch lower to 9.9%Y/Y, nevertheless still a record high. This release will also provide more granular detail, along with the ECB’s other measures of underlying inflation including the super core and trimmed mean estimates. A raft of October sentiment indicators are due this week, including the German ZEW investor survey (tomorrow), INSEE business survey (Thursday) and European Commission flash consumer confidence index (Friday). n terms of ECB-speak, Chief Economist Lane is due to participate today in a roundtable discussion on a New European Fiscal Framework, while Executive Board member Schnabel is due to speak tomorrow.

UK CPI inflation set to rise back above 10%Y/Y, leaving retail sales and consumer confidence weaker
In terms of UK economic data, Wednesday’s CPI inflation report for September is most noteworthy. Despite an anticipated easing in energy inflation as petrol prices fell again, headline inflation is expected to rise back above 10%Y/Y as the components for food, other goods and services maintained a steady uptrend. Indeed, we forecast core inflation to rise a further 0.2ppt to a new series-high of 6.5%Y/Y. Meanwhile, Friday will bring retail sales data for September, which seem likely to report a further drop last month not least as most retailers shut or reduced opening times on the additional bank holiday for the Queen’s funeral. But these data are also likely to illustrate the deterioration in households’ purchasing power, with reduced spending on non-essentials and big ticket items. The latest GfK consumer confidence survey (Friday) seems bound to offer a gloomy outlook for near-term spending prospects too. In terms of BoE-speak, Deputy Governor Jon Cunliffe and Executive Director for Markets Andrew Hauser are due to appear before the Treasury Select Committee on Wednesday to testify on the recent gilt market intervention, with the BoE’s plans for active gilt sales also likely to be discussed.

IP and housing indicators the main data focus in the US this week
In the US, following today’s Empire Manufacturing survey for October, tomorrow will bring September’s IP report, which is expect to show only very modest growth – our economists in Daiwa America forecast a rise of 0.2%M/M – merely offsetting the drop in August. Focus in the second half of the week will turn to the housing market, with housing starts figures (Wednesday) likely to report a sizeable drop in September (Daiwa America team expecting a decline of around 5%M/M) following a surge in August and reflecting waning demand amid a jump in borrowing costs. The latest existing home sales figures (Thursday) are likely to report the eighth consecutive monthly decline, consistent with the weakness in mortgage applications and pending home sales. Separately, FOMC members Kashkari and Bostic will speak publicly tomorrow, followed by Evans (tomorrow) and Jefferson and Cook (Wednesday).

Chinese Q3 GDP expected to report post-lockdown bounce in growth
In China, while focus will be on the 20th Communist Party Congress, tomorrow’s Q3 GDP report is expected to report a rebound in growth over the summer as Covid-restrictions were relaxed somewhat – our China economist Kevin Lai forecasts growth of 3.3%Y/Y, up from 0.4%Y/Y in Q2. That would imply quarterly annualised growth of about 2.8%, following the drop of 2.6% in Q2. But while the monthly activity figures are expected to show that IP continued to recover at the end of the quarter, retail sales growth is expected to have moderated slightly in September.

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