Japanese PMIs point to a sharp contraction in activity February
Consistent with the downbeat tone of last week’s Reuters Tankan survey, today’s flash PMIs out of Japan reported a marked deterioration in conditions in February as record coronavirus cases, pandemic-related restrictions, and higher cost burdens took their toll on economic activity. Perhaps inevitably, the hit was most striking on services with the activity index down for the second successive month and by 4.9pts to 42.7, the steepest monthly drop since April 2020 and the lowest reading since May that year. And there was a further decline in new business, with the relevant index down 3.5pts to 45.3, a twelve-month low.

There was also notable weakness reported in the manufacturing sector too, with the output PMI down a hefty 6.1pts this month to 48.7, the first contractionary reading since September, perhaps reflecting intensified supply challenges as Asia battled the latest pandemic wave. And while the new orders index continued to point to expansion, at 51.0 it was the softest for five months with an easing in external demand too. Admittedly, the manufacturing survey will also likely have been impacted by the Lunar New Year holiday, so we would expect a bounce back in activity in the sector next month.

Overall, the composite output PMI was down for the third consecutive month, by 5.3pts to 44.6, a nineteen-month low, with the new orders component at its weakest since August. But while firms cost burdens rose to a series high – the input price PMI rose 1.4pts to 63.2 – they continued to largely absorb these higher prices rather than pass them on to consumers, with the output price PMI down 1.3pts to 51.8, a five-month low.

Focus in Japan over the remainder of the week will turn to inflation. After last week’s national CPI figures showed an easing in the headline and core rates in January, tomorrow’s BoJ estimates of underlying inflation might well suggest a further modest increase in price pressures, with particular focus on the trimmed mean measure of CPI and the share of items in the CPI basket with prices rising. Tomorrow will also bring the services PPI numbers for January, followed on Friday by the Tokyo CPI figures for February. The headline CPI rate is forecast to rise 0.1ppt to 0.7%Y/Y. Japanese markets will be closed for the Emperor’s birthday on Wednesday.

Euro area sentiment surveys to dominate the data flow; final euro area CPI for January and flash French CPI for February also due
Data already released this morning reported a further rise in German producer price inflation to a new series high of 25.0%Y/Y, with a very modest easing in energy inflation more than offset of increased inflation further along the supply chain. Meanwhile, this week’s raft of economic sentiment surveys kicks off shortly with the preliminary PMIs expected to suggest an improvement in services sector conditions in the euro area and two largest member states in February as the number of new coronavirus cases appears to have peaked. And reflecting a modest easing in supply constraints, expectations are for a further improvement in the manufacturing environment too despite strong cost pressures along the supply chain and the likelihood of persistent bottlenecks. The European Commission’s detailed confidence indicators, to be published on Friday, are likely to do likewise. At the country level, Germany’s ifo business sentiment survey will be published tomorrow, followed by consumer confidence surveys for Germany, France and Italy on Wednesday, Thursday and Friday respectively.

Other data to be published this week include the euro area’s latest bank lending numbers (Friday), as well as final euro area CPI inflation figures for January on Wednesday. The preliminary estimate revealed that the headline HICP rate edged up 0.1ppt to a new series high of 5.1%Y/Y, with the largest pressures once again coming from energy prices. Indeed, while core inflation eased back (by 0.3ppt to 2.3%Y/Y), the detailed breakdown will give further insight on underlying price pressures. The end of the week will also bring the first estimates of February consumer price inflation from France, and an update on Germany’s Q4 GDP will bring the first official expenditure breakdown while also likely confirming the decline of 0.7%Q/Q in overall economic output.

ECB Governing Council to meet informally on Thursday as large majority appears in favour of accelerated phase out of net asset purchases and gradual policy normalisation
The past fortnight has brought commentary from several members of the Governing Council flagging concerns about the big upside surprises to euro area inflation in December and January, and suggesting that they are now in favour of an accelerated phasing out of net asset purchases and gradual normalisation of monetary policy – including, for some, a rate hike this year. With last week having even seen the typically dovish Chief Economist Philip Lane – who will soon start to prepare the updated economic forecasts upon which the ECB will determine its policy stance – suggest the need for gradual policy normalisation amid expectations that inflation will settle back around the 2% target over the medium term, the Governing Council will hold an informal meeting on Thursday, probably to coordinate communication about what might be forthcoming next month. Meanwhile, ECB policymakers due to speak publicly this week include Vice President de Guindos on Wednesday and Executive Board member Schnabel on Thursday.

UK flash PMIs to point to further recovery in February; BoE-speak to be watched for further near-term policy insight
Like in the euro area, the UK economic data calendar will be dominated by sentiment surveys, with the preliminary manufacturing and services PMIs for February due today. The January PMIs suggested some stabilisation in activity at the start of the year – the composite PMI rose 0.6pt to 54.2 – and, given the further easing in pandemic-related restrictions, we could see a notable improvement in the overall services activity index. Tomorrow brings the release of the CBI’s industrial trends survey, which will be followed on Thursday by the CBI’s retail sales survey and on Friday by the GfK’s consumer confidence indicators.

Tomorrow will also bring the latest public finance figures for January. In December, the government borrowed £16.8bn, the fourth-highest level of borrowing in any December since monthly records began in 1993 but below the OBR’s expectation. And while spending might well rise further at the start of the year on the back of higher interest payments, borrowing in the financial year to date is still expected to be lower than previously expected by the OBR and therefore suggest some limited room for fiscal giveaways in the Spring Statement on 23 March.

In terms of BoE-speak, MPC policymakers including Governor Bailey will testify before the Treasury Select Committee on the latest Monetary Policy Report (Wednesday), while Deputy Governor Broadbent and Chief Economist Pill will speak (Friday) at a BoE event on the monetary policy toolkit, while Deputy Governor Ramsden (who voted for a 50bps hike this month) and external MPC member Tenreyro will also speak publicly (tomorrow and Thursday respectively).

Personal income and spending, core PCE deflator, and durable goods orders feature in this week’s US dataflow
Data-wise, the most notable new US releases will come on Friday in the shape of the January personal income and spending numbers and associated deflators, as well durable goods order s data for the same month. Consistent with last week’s strong retail sales numbers, Daiwa America’s Mike Moran expects spending to have grown about 1.5%M/M, more than fully reversing December’s drop of 1.0%M/M. And in light of the CPI report, he expects the core PCE deflator to rise 0.5%M/M taking the annual rate up to 5.2%Y/Y, the highest since the early 1980s. Preliminary durable goods data should also report a return to growth in January after the dip at end-2021, benefitting from a rebound in the volatile aircraft component. After today’s national Presidents Day holiday, the week’s dataflow gets underway tomorrow with the Conference Board’s consumer survey for February, which is expected to report a deterioration in sentiment given high inflation and weaker equity markets. That would tally with the drop reported in the preliminary University of Michigan survey, the final February results of which are also due Friday. House price data also come tomorrow, with new home sales figures coming on Thursday along with the second estimate of Q4 GDP, which Mike expects to push up the estimate of growth by 0.6ppt to 7.5%Q/Q annualised. Finally, the coming week will also bring plenty of Fed-speak – including Governor Bowman today, Atlanta Fed President Bostic tomorrow, and Richmond Fed President Thomas Barkin in Thursday – ahead of Jay Powell’s semi-annual testimony to Congress on 2 and 3 March.