Inflationary pressures remain subdued

Emily Nicol

With Donald Trump having yesterday raised the spectre of a re-escalation of his trade war with China, threatening that US tariffs on Chinese imports would be “raised very substantially” if the phase one deal wasn’t signed, Asian stock markets today have had a negative tone with declines registered almost across the board. Given the escalating unrest in Hong Kong, the Hang Seng was worst hit among the major indices, and is currently down more than 2.0% on the day. In contrast, however, Chinese equities were impacted to a far lesser degree, with the CSI300 closing down just 0.1%. While the yen has given up some of yesterday’s gains to be close to ¥109.1/$, the Topix closed down a little more than 0.5% as the latest producer prices data added to evidence of intensifying disinflationary pressures in the wake of the consumption tax hike (see below).

With 10Y yields having yesterday reached their highest levels since April, it’s perhaps no great surprise that JGBs made gains today, roughly down a couple of bps across the curve (10Y yields down to -0.06%). USTs have locked in yesterday’s gains, with 10Y yields currently close to the evening’s lows near 1.915%. But ACGBs are little changed despite some weak Aussie wage data (more on this below too), while New Zealand government bonds sold off (2Y yields up 17bps back above 1.00% for the first time since early August) and the Kiwi dollar leapt after the Central Bank unpredictably failed to cut rates. Euro area govvies (except BTPs, ahead of this morning’s auction) have largely opened a touch firmer, with Spanish government bonds following the pack after yesterday saw the centre-left Socialist and populist left Podemos reach a deal to form a minority coalition, which will still require the backing of regional parties to be able to govern.

Looking ahead, the day’s highlights include CPI inflation data from the UK and US, ahead of Fed Chair Powell’s testimony to Congress.

Today’s goods PPI data out of Japan offered more insight into inflationary pressures (or their lack of) at the start of Q4 in the wake of last month’s consumption tax hike. In particular, with producer prices having risen a sizeable 1.1%M/M in October, this saw the annual rate of decline ease from -1.1%Y/Y to -0.4%Y/Y, the smallest drop since June. But when excluding the effect of the consumption tax hike, there was a much steeper pace of decline in October, with the annual rate down a further 0.9ppt to -1.9%Y/Y, the weakest since November 2016.

Of course, energy prices continued to play their role in the weakness, with petroleum and coal product prices down more than 13%Y/Y. And with prices of overall raw materials down 13%Y/Y, while prices of intermediate materials were down 3½%Y/Y, there was further downward pressure on final corporate prices for consumer goods too, with annual inflation on this measure falling deeper into negative territory in October to -3.1%Y/Y, the lowest since 2016. And while prices of imported consumer items were down a hefty 6.1%Y/Y, there was a further weakening in underlying domestically generated inflationary pressures too, with this measure down 1ppt to -2.0%Y/Y. As such, when the latest consumer price inflation figures are published on 22 November, we expect the picture to remain very subdued – indeed, when excluding the impact of the consumption tax hike, we might well see both headline and core measures of CPI fall closer to zero in October.

Euro area:
Ahead of Thursday’s revised Q3 GDP figures, today will bring the euro area’s industrial production data for September. Consistent with the weakness seen in Germany, Italy and Spain at the end of Q3, aggregate euro area IP is expected to have declined by around 0.2%M/M, partly reversing the increase in August. And with output having fallen in July, this would leave it down more than ½%Q/Q in Q3, admittedly a more modest drop than in Q2 but nevertheless the fourth quarterly contraction out of the past five.

This morning has already seen the release of final German inflation figures for October, which offered no surprises. In particular, the headline EU-harmonised CPI rate aligned with the flash estimate of 0.9%Y/Y, unchanged from September at a near-three-year low. Within the detail, energy inflation remained the main source of downward pressure in October, down 1ppt to -2.1%Y/Y, the lowest since 2016. While non-energy industrial goods inflation moved sideways at 0.9%Y/Y last month (the lowest since March), services inflation edged higher by 0.1ppt to 1.3%Y/Y. As such, core CPI increased slightly by 0.1ppt to 1.1%Y/Y, nevertheless still weak compared with the start of the year and suggestive of still very subdued underlying inflationary pressures.

Elsewhere, today will also bring an ECB Governing Council non-monetary policy meeting, the first under new ECB President Christine Lagarde. While this will cover non-monetary policy decisions, the agenda reportedly will include discussions on how to improve the central bank’s internal policy discussions, with proposals to include a formal vote on policy decisions on the Governing Council. As usual, there will be no press conference following today’s meeting, with any decisions taken to be published in the ECB’s monthly survey of non-monetary ECB decisions tomorrow. In the markets, Germany will sell 10Y Bunds, while Italy will sell bonds with various maturities.

The main economic focus in the UK today will be on October’s inflation figures, which are expected to show a further fall in the headline CPI rate by 0.1ppt to 1.6%Y/Y, a touch stronger than assumed by the BoE in its Monetary Policy Report last week. While the downward trend will continue to principally reflect energy inflation, not least given Ofgem’s reduced price caps on tariffs that month, the core CPI rate is also expected to be little changed at 1.7%Y/Y, suggesting that underlying price pressures remain subdued. This morning will also bring the ONS house price index for September, which is expected to report a further moderation in annual house price growth.

In the US, today will bring several noteworthy events, including Fed Chair Powell’s testimony on the economy before the Joint Economic Committee, which will be closely watched for any new insight into the near-term monetary policy outlook. Continued criticisms from Donald Trump, which were repeated yesterday as the President again called for negative rates from the Fed, are also likely to be discussed. Data-wise, October’s CPI release is expected to show that despite an anticipated pickup in prices of 0.3%M/M, which would be the most in three months, the annual inflation rate moved sideways at 1.7%Y/Y. Core CPI is also expected to be firmer than in September, up 0.2%M/M, which would similarly leave the headline rate moving sideways at a firmer 2.4%Y/Y. Finally, the House of Representatives will convene its first public impeachment hearings into the activities of the President.

In Australia, ahead of tomorrow’s employment report for October, today brought the latest quarterly wage price index from the ABS. Against the backdrop of slowing employment growth, this showed that headline wage growth moderated slightly in Q3, by 0.1ppt to 2.2%Y/Y, a five-quarter low. And there was a softer pace of growth in the private and public sectors alike (down 0.2ppt to 2.2%Y/Y and 2.5%Y/Y respectively). With the unemployment rate suggesting still large amounts of spare capacity in the labour market, wages look set to remain relatively subdued for some time to come and seem highly unlikely to provide the upward impulse to inflation that is required to sustain inflation within the RBA’s 2-3% target.

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