Tokyo inflation took a significant step down

Chris Scicluna
Emily Nicol

Tokyo inflation falls sharply due government’s household energy support
As expected, Tokyo inflation eased sharply in February, by 1ppt to a five-month low of 3.4%Y/Y, with the BoJ’s forecast measure of core inflation – CPI excluding fresh food – similarly down 1ppt to 3.3%Y/Y. This principally reflected the impact of the government’s household energy support package, with electricity and gas prices down 18%M/M and 9%M/M respectively, to leave the annual rate of energy inflation down some 21ppts to 5.3%Y/Y, fully accounting for the drop in headline inflation. Among the other detail, a moderation in fresh foods inflation was offset by a pickup in prices of processed foods, which rose by the strongest annual rate since 1976. But a surge in prices of refrigerators last month, pushing the respective rate up 35½ppts to 43.6%Y/Y, also added 0.1ppt. As such, the internationally comparable core CPI rate, which excludes food and energy, rose 0.1ppt to 1.8%Y/Y, the highest since 2014, and the strongest for thirty years when excluding the impact of consumption tax hikes.

Today’s data support the view that national CPI peaked in January, with our colleagues in Tokyo forecasting the BoJ’s forecast core CPI measure to fall back to 3.1%Y/Y in February and maintain a gradual downwards trend through to the summer, where they expect inflation to fall back below the 2% target. However, the outlook for inflation remains uncertain, in part due to the government’s pending decision on the application of various utility firms to hike prices, which could provide new impetus in June. Nevertheless, when excluding fresh foods and energy, our colleagues expect inflation to move broadly sideways at around 3%Y/Y through to July, before easing back below the BoJ’s target at the start of 2024.

Japanese unemployment rate fell back in January as the labour market continued to tighten
Of course, the outcome of the current Shunto wage round is also expected have an impact on the inflation outlook. And in this context, today’s numbers suggested a further tightening in the labour market at the start of the year. In particular, the unemployment rate unexpectedly declined by 0.1ppt in January to 2.4%, just 0.2ppt above the pre-pandemic low, as the number of people in employment rose a further 180k. While the job-to-applicant ratio moved sideways at 1.35x, there was a further increase in the number of new jobs offers in January, which rose to the highest level since 2019, likely reflecting an increase in labour demand from consumer-facing sectors that expect to see stronger demand from the return of overseas visitors.

German trade surplus at near 2-year high as imports continue to fall sharply
German goods trade remained subdued at the start of the year, but still appears to have provided support for overall economic growth albeit principally due to the weakness of imports. In particular, following a sharp drop of 6.3%M/M in December, which was the steepest since the first wave of Covid-19, the rebound in the value of German goods exports in January was underwhelming at just 2.1%M/M. That left exports down 2.6%3M/3M – similarly the weakest figure on that basis since the first wave of Covid-19 – and still 2.1% below the Q4 average to be firmly on track for another quarterly drop in Q1. However, the value of imports was even softer, falling for a fifth successive month in January and by 3.4%M/M to be down a whopping 9.8%3M/3M and more than 8% below the Q4 average. As a result, Germany’s trade surplus on an adjusted basis to €6.7bn to €16.7bn, the highest in almost two years.

By destination, exports to other EU countries were up 0.7%M/M in January with imports from those countries up a similar 0.6%M/M. But exports beyond the EU rose 3.8%M/M – benefiting from a rebound in shipments to the UK (7.8%M/M) with growth also to the US (3.1%M/M) and China (1.4%M/M) – while imports from beyond the EU fell a steep 7.5%M/M. The weakness in the value of imports will in good part reflect lower import prices – not least of energy and other commodities – as the shock to Germany’s terms of trade continues to unwind. But it also reflects soft domestic demand, which we suspect will contract for a second successive quarter in Q1. So, while the outlook for German export volumes remains subdued – indeed, the manufacturing new export orders PMI was very weak at below 40 in February – net trade should make a second successive positive contribution to German economic growth in Q1.

French manufacturing output starts 2023 on the back foot weighed by transport goods
French manufacturing production fell 1.8%M/M in January to fall 0.9% below the Q4 average. The weakness was due not least to a steep drop of 6.7%M/M in transport equipment, with autos and related items down 2.6%M/M but other transport items down 9.5%M/M. Exports of machinery and other equipment provided some support, up 1.0%M/M thanks not least to growth in computers and other electronic goods, with clothing and textiles also up 1.0%M/M. Beyond the manufacturing sector, following weakness in December construction output rose a modest 0.2%M/M. But mining, energy and other utilities fell 3.0%M/M, and so overall industrial production (excluding construction) fell 1.9%M/M to be 0.3% below the Q4 average. With the French manufacturing output PMI having dropped in February to a five-month low of just 45, and the similar INSEE survey indices underwhelming, risks of a contraction in French IP over the first quarter as a whole appear significant.

Euro area PPI inflation likely to have fallen back amid lower energy prices
After the upside surprise to yesterday’s flash CPI estimate, and particularly worrying jump in core inflation, this morning will bring more insight into goods price pressures in the euro area at the start of the year, with the release of PPI figures for January. These are expected to reveal a fifth consecutive drop in the annual growth rate, likely to its lowest reading in sixteen months. The final services and composite PMIs are also due and expected to align with the flash release, which showed that the euro area services activity PMI rose 2.2pts to 53.0, thanks to a resurgence in consumer-facing activities such as tourism and recreation. Indeed, the Spanish indices, just released, saw the services PMI jump 4pts in February to 56.7, the highest for ten months, to leave the composite output PMI (55.7) trending some 4½pts above the Q4 average and consistent with a solid expansion in Q1. Meanwhile, revised Italian Q4 GDP data will the first official expenditure breakdown.

Final UK PMIs to confirm a notable rebound in services activity in February
The final February services and composite PMIs from the UK are expected to confirm the signal from the flash estimates of a notable rebound in services activity, with the flash index having leapt 4.6pts to an eight-month high of 53.3. With the final manufacturing output index having been revised slightly lower, we might well see the headline composite PMI downwardly revised slightly from 53.0, albeit still implying surprisingly solid expansion last month.

US services ISM set to moderate but remain consistent with a respectable pace of growth
In the US, today will bring the services ISM survey for February. While the headline activity index likely slipped back, it is expected to remain consistent with a respectable pace of growth, amid still solid domestic demand. 

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