Morning comment: Weak Japanese CPI

Chris Scicluna
Emily Nicol
Mantas Vanagas

Stronger-than-expected headline readings from both the Philadelphia Fed’s manufacturing survey and the weekly jobless claims report saw Wall Street post slight gains across most of Thursday’s session. However, stocks rallied further in the late afternoon, lifting the S&P500 to a gain of 0.8%, as investors reacted to a WSJ article. That article indicated that US officials were debating whether to reduce tariffs on imports from China, perhaps to encourage greater trade concessions and to help calm financial markets. According to the report, Treasury Secretary Steven Mnuchin is in favour of such a move – the Treasury Department subsequently denied that any recommendations had been made – whereas US Trade Representative Robert Lighthizer has reservations. The generally positive tone was reflected in the bond market, with the 10-year Treasury yield rising 2bps to 2.74%. US credit spreads also narrowed slightly.

Asian markets have run with the positive lead provided by Wall Street. In equity markets the strongest gains were seen in mainland China, Hong Kong and Japan, where key bourses rose around 1%. Gains in South Korea, Singapore and Australia were somewhat smaller. In the bond market, JGB yields edged higher despite another very subdued CPI report (more on this below). In forex markets, meanwhile, the yen resumed its weakening trend, depreciating to close to ¥109.5 for the first time since 2 January.

Looking ahead to the rest of the day, the day’s Brexit newsflow seems unlikely to provide a breakthrough from Theresa May’s cross-party consultations while the UK’s latest retail sales figures seem likely to be weak. The US dataflow, however, seems likely to be broadly positive, with firm manufacturing production and still-elevated consumer confidence. And the Fedspeak will continue with NY Fed President John Williams set to talk publicly.  

As far as economic data were concerned, the domestic focus in Japan today was on the CPI report for December. As the market had expected, the headline index fell a seasonally-adjusted 0.2%M/M, in part due to a further 2.7%M/M decline in the price of fresh food (now down 9.4%Y/Y). As a result, the annual inflation rate fell a further 0.5ppts to just 0.3%Y/Y, marking the weakest outcome since October 2017. Importantly, the measure used by the BoJ in its quarterly Outlook Report forecast – which excludes fresh food prices from the CPI – fell 0.1%M/M in December, lowering annual inflation by a greater-than-expected 0.2ppts to a 7-month low of 0.7%Y/Y.

As expected, a 4.3%M/M decline in petroleum product prices provided additional downward impetus to the CPI this month. As a result, the BoJ’s preferred measure of core prices, which excludes both fresh food and energy prices, reported no change in prices on an adjusted basis in December. This marked a fourth consecutive month of price stability and left annual inflation steady at just 0.3%Y/Y – disappointingly, also unchanged from where it had stood a year earlier. The measure of core prices that strips out prices of all food items and energy (as monitored closely in many other major countries) was also unchanged for a fourth consecutive month, leaving annual inflation in that measure at an even weaker 0.1%Y/Y. Elsewhere in the detail; prices for non-energy industrial goods were unchanged from a year earlier while inflation in the services sector was stable at 0.3%Y/Y – the latter 0.2ppts firmer than a year earlier but still no higher than seen back in February 2018.

So in summary, even given ongoing extreme tightness in the labour market, at this stage the underlying inflation pulse remains barely positive and nowhere near consistent with the BoJ’s current 2% target. And notwithstanding their recent partial rebound, weaker global oil prices are expected to apply downward pressure on the headline and forecast measures of core inflation over coming months, as well as inflation expectations. As a result, it seems very likely that the BoJ will again be forced to downgrade the inflation forecasts contained in next week’s updated Outlook Report, at least for FY18 and FY19. Even so, the BoJ will likely remain constructive regarding the medium-term outlook for inflation, albeit understandably reluctant to place a date on when the 2% target might actually be achieved. As a result, the BoJ will very likely retain its current policy settings next week, although Goushi Kataoka will doubtless maintain his call for additional policy easing to at least lock in the recent decline in longer-term JGB yields.

In other news, METI’s final IP report for November revealed a 1.0%M/M contraction in output in November, just 0.1ppt smaller than estimated in the preliminary report. As a result, it remains the case that IP is on track for growth of about 2%Q/Q in Q4, even if output in December proves flat rather than expands 2.2%M/M as indicated by the forecast of firms (which is usually far too optimistic). The final report also indicated a 1.2%M/M decline in shipments (up 0.9%Y/Y), a 0.1%M/M rise in inventories (up 0.6%Y/Y) and a 2.2%M/M decline in the inventory ratio (down 0.3%Y/Y).    

The end of an exhausting week for Brexit news seems unlikely today to bring any breakthrough ahead of Monday’s deadline for the submission to Parliament of the Theresa May’s Plan B. Of course, the key date now will be 29 January, when MPs will get an opportunity to vote on, and amend, the Government’s proposals. Today’s UK dataflow, meanwhile, brings the latest retail sales figures. Some major retailers reported relatively decent festive period sales. But, with consumer confidence having taken a turn for the worse towards the end of the year, overall High Street momentum appears to be weak. And consistent with the subdued results of the latest retail sector surveys such as the BRC’s, today’s figures will probably show a drop in sales – expectations are for a decline of nearly 1%M/M, which would leave sales in Q4 only slightly higher compared to Q3.

Euro area/US:
The week in the euro area is set to end on a quiet note with the ECB’s balance of payments data for November. With net selling of BTPs by non-residents in five of the previous six months, the magnitude of foreign flows in and out of the Italian bond market will arguably be more interesting in today’s data than the size of the euro area current account surplus, which seems bound to remain ample at well above €20bn but well down from the recent peak above €40bn reached in autumn 2017.

In the US, today will bring December’s industrial production report and the preliminary University of Michigan consumer sentiment survey for January. Manufacturing output looks set to be firm, reflecting the solid gain in employment and longer workweek in the sector already reported for that month. Utility output, however, seems likely to restrict the gain in the overall headline IP figure. Meanwhile, consumer sentiment seems likely to have remained close to the average of the second half of 2018 (98.1) supported by strong jobs growth. Finally, the Fed-speak will continue today as New York Fed President John Williams will give a talk on the economic outlook and monetary policy.   

Australia/New Zealand:
There were no top-tier economic data out of Australia today, while New Zealand’s dataflow brought the Business-NZ manufacturing PMI, which ended last year on a stronger note, rising 1.4pts in December to an 8-month high of 55.1. Within the detail the production index rose 3.8pts to 55.7, whereas the new orders index eased 0.2pts to 56.1. The employment index rose 1.0pts to 52.2, albeit leaving it a fraction below its October reading.


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