Japanese Reuters Tankan signals ongoing manufacturing challenges, as well as worsening conditions at retailers and real estate firms
Today’s monthly Reuters Tankan survey – which typically offers a reliable guide to the BoJ’s comprehensive quarterly Tankan – largely echoed the findings from yesterday’s flash PMIs that suggested mixed fortunes for the manufacturing and non-manufacturing sectors. Admittedly, in contrast to the PMIs, the net share of non-manufacturing firms assessing conditions to be good once again fell back in February, by 3ppts to +17%, a five-month low but still a respectable level. The weaker outturn largely reflected a marked decline in optimism among wholesalers, to the lowest since August 2021, as well as renewed pessimism among retailers reflecting lacklustre domestic demand. And real estate firms remained downbeat about conditions too.

But like the PMIs, the Reuters Tankan suggested that manufacturers remain most downbeat with the net balance of firms still assessing conditions to be worsening (-5%). The businesses surveyed cited the impact of persisting chip shortages, rising prices of raw materials and fuel, yen weakness and higher wages, as well as the lack of adequate pass-through of these additional costs to customers. Within the detail, electrical machinery manufacturers were the most pessimistic since June 2020 (a net share of 28%), while auto manufacturers considered conditions to be still deteriorating this month too (a net share of 15%).

German inflation estimates unrevised, but new data for last year now suggest no improvement from the autumn peak
Contrary to some speculation, there were no revisions made this morning to the flash estimates of German inflation in January. So, the EU-harmonised HICP rate was confirmed at 9.2%Y/Y, down 0.4ppt from the original estimate for December and some 2.4ppts below October’s peak. And the national CPI measure was confirmed at 8.7%Y/Y, up 0.1ppt from the original estimate for December but 1.7ppts below the peak.

Notably, however, the seemingly improved picture in large part reflects the re-weighting of the inflation basket at the start of the year, which increased the weights on food and drink, as well as healthcare, transport and hospitality, but significantly reduced the weight on household utilities. Basing last year’s figures on the new weights, the CPI rate in December would have been just 8.1%Y/Y, while the peak would have been just 8.8%Y/Y, suggesting a firmer rebound in inflation in January and no meaningful drop in inflation from the autumn. Indeed, based on the national measure, and given the adjustment to the government price support at the start of the year, energy inflation rose almost 3ppts to 23.1%Y/Y as prices rose 8.3%M/M. In contrast, food inflation edged down 0.2ppt to 20.2%Y/Y. But the national core measure (excluding energy and food) rose 0.4ppt to 5.6%Y/Y. Later this morning, final Italian inflation numbers will provide further guidance to tomorrow’s updated euro area inflation estimates.

INSEE survey suggests modest improvement in French business climate with diminishing supply restraints but mixed picture on prices; German ifo survey to come
After yesterday’s flash PMIs suggested a significant pickup in economic activity this month, this morning’s INSEE survey results – which take stock of developments in a far broader set of economic sectors than the PMIs – also reported an improvement in the French business climate, albeit one that appeared far more modest. So, for example, the headline business climate index merely reversed the 1pt drop last month to return to December’s level (103). And while that remained above the long-run average, it was also still some 10pts below the level a year earlier, and left the Q1 average little changed from the average in Q4 when GDP rose just 0.1%Q/Q.

Within the detail, the INSEE survey reported modest improvement in manufacturing, services and retail. But confidence in construction deteriorated to the lowest level since the second half of 2021, albeit also remaining above the long-run average. The survey also suggested a slight moderation in employment demand, as well as a further decline in the share of firms in both manufacturing and construction complaining of supply-side constraints to production. However, while expected selling prices in manufacturing, services and construction eased somewhat, expected selling prices in retail trade increased further.

Fed minutes might not fully reflect current balance of views on FOMC
The main focus in the US today will be the minutes of the 31 Jan-1 Feb FOMC meeting. However, after that meeting saw the pace of rate hikes slow to 25bps and Chair Powell note that the disinflationary process had begun, the US dataflow has strengthened, with a string of eye-catching upside surprises, not least in the labour market. So, the balance of views on the Committee to be revealed in the minutes might not necessarily be a wholly reliable guide to the current state of play.