BoJ Tankan reports further rise in firms’ inflation expectations
The BoJ’s Tankan survey provided plenty of insights into current economic conditions and the outlook for growth. But with the rest of the major economies grapping with high inflation and rapidly rising interest rates, the main focus was on the inflation indicators. And the Tankan once again showed that Japanese firms have further increased their expectations of inflation over coming years. Indeed, with firms seemingly more willing to pass on higher cost burdens to consumers over the near-term at least, on average, firms expect “general inflation” to be 2.6% this year (an upwards revision of 0.2ppt from the last Tankan survey), and still at the BoJ’s 2% target in five years’ time. Admittedly, this largely reflected expectations of small firms, while large firms forecast inflation to fall back below target (to about 1½%) in three years’ time. In addition, firms still expect their own prices to rise significantly less than general inflation over the coming five years – e.g. large manufacturers expect a cumulative increase in their output prices of just 3.2% over that period. And while firms appeared to be more willing to pass on costs to customers – and by the most since the 1970s - they still see input costs rising significantly faster than their own selling prices.
Tankan suggests business conditions remain very subdued
The BoJ’s ultra-accommodative policy stance will have been given further credence by the Tankan’s sentiment indices, which on the whole point to a subdued recovery. Contrasting with expectations, the headline diffusion index (DI) for large manufacturers slipped back in Q3, by 1pt to 8, a six-quarter low, with notable weakness in petroleum, chemicals and nonferrous metals subsectors. This was consistent with the latest manufacturing PMI, for which the update survey today showed the output index falling a steeper-than-previously estimated 0.9pt to 48.3, a twelve-month low. Meanwhile, despite the easing in Covid restrictions, according to the Tankan, the improvement in non-manufacturing conditions was marginal, with the associated DI rising just 1pt to 14 and expected to fall back to 11 in Q4. When including SMEs, the overall DI of business conditions rose just 1pt to 3 in Q3 and was forecast to fall 2pts in Q4 to 1, consistent with only very tepid economic recovery.
Tankan points to stronger sales and capex growth despite uncertainties ahead
Despite the uncertain outlook ahead, Japanese firms continued to expect solid sales growth in the current fiscal year, with the forecast for all firms upwardly revised by 1½ppts to 6.0%Y/Y.
But despite a marked upwards revision from three months ago manufacturers still expected profits to be down on the previous fiscal year, although this was offset by stronger profit expectations among non-manufacturers. Given significant headwinds surrounding the outlook, it was perhaps somewhat surprising to see that firms boosted their already strong capex intentions this year. Indeed, large firms were forecasting an increase of 21.5%Y/Y. Of course, improved capex plans might well reflect the ongoing need to address labour shortages, with the Tankan suggesting that firms of all size and across manufacturing and services sectors alike signalled insufficient staffing levels over the past quarter.
Looking ahead, tomorrow will bring the Tokyo CPI figures for September, which are expected to show a slight easing the headline inflation rate due to weaker energy prices. The BoJ’s regional economic report will be published on Thursday and likely to echo the findings from today’s Tankan survey, while Friday will bring the latest monthly household spending and consumption activity data, along with average wage figures for August.
ECB account to be watched for further discussions on future rate hikes, any debate about QT and a possible reverse-tiering system
The most noteworthy release from the euro area this week will be the publication on Thursday of the ECB account from its 8 September monetary policy meeting, where the Governing Council raised interest rates by 75bps and signalled further tightening over the next several meetings. The account will be watched for the debate between the hawks and doves, any further discussion on the likely pace of hikes going forward, as well as any debate about QT and a possible reverse-tiering system to reduce interest payments on banks’ excess reserves.
In terms of economic data, following Friday’s flash CPI estimates, euro area producer price figures (tomorrow) will provide an update on inflationary pressures at the factory gate in August. Given the surge in the German PPI rate to a new series high due to the energy shock, we expect the headline euro area producer inflation rate to jump to a new record from July’s reading of 37.9%Y/Y to well above 40%Y/Y, although we might well see a further easing in the core PPI rate. Friday’s ECB survey of consumer expectations will be watched too, while the final PMIs will provide further insight into firms’ price pressures this month, as well as more general economic conditions, with the final surveys for manufacturing due imminently, services on Wednesday and construction on Thursday. In addition, Thursday’s release of euro area retail sales figures will offer an update on the sector in the middle of the summer, with spending on non-essential goods likely to have been hampered by rising prices and increased spending on services. Among the country releases, Germany’s goods trade (Wednesday), factory orders (Thursday) and industrial production numbers (Friday), all for August, will provide an update on the likely extent to which the manufacturing sector will be a drag on GDP growth in the third quarter.
UK politics to remain under the spotlight as Chancellor reverses decision to abolish 45% top income tax rate
With seemingly increasing risks of rebellion among Conservative MPs ahead of this week’s Tory party conference, UK Chancellor Kwarteng this morning announced a massive U-turn on one of his key min-budget measures, with plans to reverse his decision to abolish the 45% top income tax rate. This saw sterling rise against the dollar and Gilts open notable higher, particularly at the short end. In terms of the UK data calendar it is set to be another relatively quiet week, kicking off today with September’s final manufacturing PMIs, which will be followed by the equivalent services and construction surveys on Wednesday and Thursday respectively. Despite edging slightly higher on the month, the flash manufacturing output index (44.4) still implied a marked pace of decline at the end of Q3. In addition, the latest REC/KPMG Report on Jobs (Friday) will be worth watching for a further drop in labour demand amid weakening economic conditions, while the latest new car registrations figures for September are due (Wednesday).
A busy week for top-tier US releases including ISM surveys and payrolls report
It will be a busy week for top-tier US economic releases, kicking off today with the manufacturing ISM, which is forecast to point to a further slowdown at the end of Q3 amid growing expectations of recession ahead and following a sharp retreat in the PMI for the Chicago region. The services ISM (due Wednesday) is also expected to have edged lower in September, albeit the index is still likely to remain firmly in expansionary territory (the Bloomberg survey consensus is drop of 0.9pt to 56.0). All eyes at the end of the week, however, will be on Friday’s employment report. Low unemployment claims and elevated job openings suggest a solid pace of hiring in September. While payrolls are unlikely to match robust average growth of 562k in 2021, hiring is likely to remain close to the average of 381k in the past six months – our colleagues in Daiwa America are forecasting an increase of 375k. While the expected pace of job gains ordinarily would be firm enough to nudge the unemployment rate lower, the possibility of workers returning to the labour force is likely to leave the jobless rate unchanged at 3.7%.