Tokyo CPI inflation disappoints

Chris Scicluna

Asian equities post modest gains, but Australian markets down as China sets new tariffs on Aussie wine
With US markets closed yesterday, Asian markets generally had a quiet end to the week with most of the key regional bourses posting modest gains today. Despite Japan recording a further 2,500 new coronavirus cases on Thursday, the TOPIX rallied 0.5% to set a fresh 2-year high, led by gains in healthcare, IT and real estate stocks. Slightly smaller gains were seen elsewhere in the region. However, Australia’s ASX200 fell 0.5% after tensions between Beijing and Canberra were raised by China’s announcement that, effective tomorrow, it would impose anti-dumping tariffs of over 100% on imports of Australian wine – a move that is probably not unrelated to Australia’s recent criticism of China’s actions in Hong Kong. Australia’s Trade Minister labelled the move ‘grossly unfair, unwarranted, unjustified’, and said that he would take the case to the WTO. China imported A$1.2bn of Aussie wine over the last 12 months, making it by far the industry’s largest foreign customer. That said, these purchases still account for only 0.3% of Australia’s total merchandise exports. In the bond market, US Treasuries have reopened slightly stronger (the 10Y yield is down 2bps from Wednesday’s close). Meanwhile, the US dollar has weakened during Asian trading, with $/¥ breaching 104 and the Kiwi dollar setting a fresh 2-year high. But following gains yesterday, most European govvies have opened lower today.

Non-core factors drive Japan’s Tokyo CPI deeper into deflationary territory
The only economic news in Japan today was the release of the advance CPI for the Tokyo area for November. In summary, in a replay of the October outcome, greater-than-expected weakness in non-core prices resulted in a larger-than-expected decline in headline inflation, but core inflation was essentially stable in line with market expectations. After adjusting for seasonality, the headline CPI index declined 0.3%M/M, causing annual inflation to fall 0.4pts to -0.7%Y/Y – 0.2ppts below market expectations and the weakest annual inflation reading since March 2013. The key driver of this month’s soft result was a further 7.0%M/M decline in the price of fresh food, which is now down 1.5%Y/Y (the first annual decline since February). So while the price of other food fell just 0.1%M/M, the overall price of food fell 1.3%M/M in November and was down 0.3%Y/Y. Meanwhile, the price of energy fell a further 2.3%M/M in November – fuel, electricity and gas prices all moved lower – and so were down 8.9%Y/Y (the largest decline since November 2016).

Given those movements, the core index forecast by the BoJ, which excludes only fresh food prices from the CPI, fell a less-worrying 0.1%M/M, albeit still causing annual inflation on this measure to weaken a further 0.2ppts to -0.7%Y/Y – 0.1ppts below market expectations. Moreover, the narrower measure of core prices preferred by the BoJ, which excludes both fresh food and energy, increased 0.1%M/M, leaving annual inflation steady at -0.2%Y/Y – in line with market expectations. The even narrower measure of core prices used in many other countries, which excludes all food and energy prices, also increased 0.1%M/M, causing annual inflation on this measure to remain at -0.3%Y/Y. While these figures are clearly very weak, the BoJ can at least take some comfort from the fact that the narrower measures of core prices have increased incrementally since being dragged sharply lower by the impact of the Government’s travel subsidy programme back in August.

In the detail, after excluding the impact of lower fresh food prices, goods prices declined 0.2%M/M in November and were down 0.6%Y/Y. Industrial product prices were unchanged during the month but were still up 0.5%Y/Y. Services prices were also unchanged during the month but declined 0.8%Y/Y for a third consecutive month, with the annual decline continuing to be driven by lower prices in the accommodation sector. Indeed, hotel charges remained down over 34%Y/Y in November, again largely reflecting the Government’s travel subsidy programme.

China’s industrial profits rebound sharply in October, albeit off weak base
This week’s data drought in China was broken today with the release of information concerning industrial profits in October. The news was positive, with growth in profits rising sharply to 28.2%Y/Y from 10.1%Y/Y previously – the fastest pace of growth since December 2011. Growth was somewhat exaggerated by a weak October 2019 base (profits had fallen 9.9%Y/Y, marking the weakest month during that year). Even so, growth in cumulative profits for the year-to-date improved to 0.7%YTD/Y – the first time this year that year-to-date profits have recorded positive growth. In the detail, cumulative profits were still down a whopping 34.5%YTD/Y in the mining sector, but profits in the manufacturing sector increased 4.2%YTD/Y despite a 52.8%YTD/Y decline in the oil refining industry and a 12.9%YTD/Y decline in the ferrous metals smelting industry.

French inflation surprises on upside in November
Ahead of the release of the results of the European Commission’s November economic sentiment survey – which seem highly likely to align with the flash PMIs to flag a drop in euro area GDP in Q4 but one that is nowhere near as sharp as those seen during the pandemic’s first wave – the euro area data focus this morning has been on France. Contrary to expectations of a slight decline, the flash estimates of French consumer price inflation in November – the first to be published by any of the large member states – pointed to a modest increase. In particular, the EU-harmonised measure rose 0.1ppt for the second successive month to 0.2%Y/Y, with the limited detail published on the national measure pointing to services and food as the culprits, while industrial goods inflation fell and energy inflation was steady.

French spending strong in October, Q3 GDP revised up as savings snap back
Meanwhile, broadly tallying with the Bank of France’s estimate of retail sales, consumer spending on goods rose a strong 3.7%M/M in October, as consumers loaded up on food items (up 7.1%M/M) ahead of this month’s closure of non-essential items. While spending on manufactured goods was stable, car purchases picked up after two months of decline, but expenditure on clothing again fell markedly.

Q3 national accounts data showed that French GDP growth was even stronger than previously thought last quarter, rising 18.7%Q/Q, up 0.4ppt from the initial release, to be down ‘just’ 3.9%Y/Y. All components of final domestic demand rebounded sharply, with household consumption up a vigorous 17.9%Q/Q to be down just 1.3%Y/Y. But despite an even stronger rebound of 23.9%Q/Q, fixed investment was still down 4.8%Y/Y. With exports (up 22.1%Q/Q) outpacing imports (up 16.8%Q/Q), net trade made a positive contribution of 0.7ppt to GDP growth having subtracted 2.3ppts to the drop in Q2. Changes in inventories, however, contributed negatively for a second successive quarter.

Finally, household gross disposable income rebounded at the strongest pace since 1983, rising 3.7%Q/Q in Q3 following a drop of 2.6%Q/Q previously to be up 1.0%Y/Y, with incomes supported by increased employment as workers returned from furlough. And as consumer spending rebounded, the household savings rate fell an extremely steep 10ppts to 16.5% in Q3, still nevertheless 1.6ppts above its 2019 average (14.9%).

UK focus remains on EU negotiations as Barnier suggests lack of progress
In another day bereft of any UK economic data, the UK focus remains on the ongoing Brexit negotiations. Reportedly, the EU’s chief negotiator Michel Barnier briefed ambassadors from the 27 member states this morning and informed them that it was still unclear whether a deal on an FTA could be done. But he is also set to consult certain fishery ministers, suggesting that a compromise on that political priority for the UK might be formulated, to unlock the door to agreement on other sensitive areas, including the level playing field and governance.

Kiwi consumer confidence nudges lower in November
The ANZ consumer confidence index fell 1.7%M/M to 106.9 in November – a relatively modest decline considering the almost 9%M/M lift recorded in October, but leaving the index still more than 10pts below its historical average. While households were slightly less negative about the year-ahead economic outlook, they were also slightly less positive about the longer-term economic outlook. Meanwhile household inflation expectations increased to a 10-year high, likely triggered by the surge in house prices over recent months.

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