UK inflation beats expectations, rising on higher clothes prices

Chris Scicluna

Asian equity markets mixed after Wall Street backtracks modestly
The US equity rally appeared to run out of steam on Tuesday, not helped by concerns about rising coronavirus cases and an October retail sales report that fell a tad short of expectations (albeit a steep upward revision to activity in August also lifted the level of spending in September). The DJI receded 0.6% from the previous day’s record high, while the S&P500 fell a similar 0.5%. In the bond market, the 10Y Treasury yield slipped 4bps to 0.86%, and has edged a little lower again in Asian and early European trading today as US equity futures also nudged down again. European stocks and government bonds have followed the same patterns on opening.

With that background, equity markets were mixed in the Asia-Pacific region today. The TOPIX fell 0.8% despite some positive news in Japan’s October trade report. Rather, investors were more concerned with mounting coronavirus cases, with Tokyo’s count rising by 493 on Wednesday – beating the previous high recorded during the July/August upswing. Moreover, the Nikkei newspaper reported that Tokyo officials were preparing to announce tomorrow that the city will move to the highest alert level and that stores might be requested to close early. Equity markets were little changed in China, but rose modestly in South Korea and Hong Kong. In the bond market, the 10Y ACG yield fell 7bps to 0.89%, reacting both to the decline in Treasury yields, a very weak Australian wages report and the announcement of a 6-day lock-down in the state of South Australia following a series of coronavirus infections linked to a cleaner at a quarantine hotel.

Japanese exports grow for 5th consecutive month, imports starting to lift
The data highlight in Japan today was the merchandise trade report for October. Encouragingly – and consistent with the marked lift in the PMIs and other survey indicators of late – exports grew 2.5%M/M in value terms. This marks the 5th consecutive month of expansion since the May low-point and means that the level of exports was down just 0.2%Y/Y – much better than the 4.5%Y/Y decline that the median analyst had forecast in Bloomberg’s survey. The news regarding imports was positive, but less buoyant than had been expected. Total import values increased 5.1%M/M – about half as much as expected – and so were still down 13.3%Y/Y, thus continuing to highlight the relatively weak state of the domestic economy (in particular relating to the demand for capital goods). Given these outcomes, the adjusted trade surplus narrowed by almost ¥200bn less than had been expected to ¥314bn in October from a downwardly-revised revised ¥440bn in September.

As usual, a little later in the day the BoJ released its analysis of the export and import data, adjusting the MoF’s statistics to remove the influence of both seasonality and changing prices. According to the BoJ, real exports increased a further 4.5%M/M in October and so were also down just 0.2%Y/Y. Moreover, real exports in October were 10.4% above the average level through Q3. Meanwhile, the BoJ estimates that real imports increased 3.4%M/M in October – but were still down 6.3%Y/Y (less than the decline in values, in large part due to lower prices for petroleum and chemicals). As a result, the level of real imports in October was 4.2% above the average level through Q3. So, with one month of the quarter in the bag, net goods exports are on track to make a positive contribution to GDP growth, but much will depend on how exports and imports perform in November.

The BoJ will release more details regarding the commodity breakdown and destination of these exports next week. In the meantime, the MoF’s own volume estimates indicate that growth in exports to China stood at a vigorous 15.6%Y/Y in October – almost identical to the growth recorded in September. Exports to elsewhere in Asia increased a more modest 2.8%Y/Y, albeit marking the first positive reading this year. Similarly, while exports to the US grew just 0.8%Y/Y, this was the first positive annual growth recorded since July 2019. Unfortunately, but not surprisingly, the situation with respect to European markets remained very weak, although the 10.9%Y.Y decline in exports did represent an improvement on the 23.3%Y/Y slump recorded in September.

UK inflation beats expectations, rising largely due to higher clothes prices
UK inflation in October beat expectations, rising in both headline and core terms, contrary to the median expectation on the Bloomberg survey of no change in either figure. In particular, headline CPI inflation rose 0.2ppt to a three-month high of 0.7%Y/Y, while core inflation also rose 0.2ppt to 1.5%Y/Y, likewise the highest since July.

Within the detail, the pressure came from goods inflation, which rose 0.3ppt to 0.0%Y/Y. And that was due principally to higher inflation of clothes, up 1.5ppts to 0.0%Y/Y, the highest since February, as prices in this category continued to buck the usual seasonal pattern due to the disruption of the pandemic. In contrast, services inflation was unchanged at 1.4%Y/Y. Firmer inflation of transport services to 1.2%Y/Y, the highest since March, and a slightly more moderate pace of decline of prices in restaurants and hotels (-0.5%Y/Y) was countered by softer inflation of prices of recreation and entertainment (down to a five-month low of 2.0%Y/Y). Among non-core items, food inflation rose 0.8ppt to a three-month high of 0.5%Y/Y, but inflation of electricity, gas and other fuels fell 2.0ppts to -8.8%Y/Y, reflecting the latest reduction in the domestic energy price cap by the regulator Ofgem.

Looking ahead, we expect UK inflation to fall back close to ½%Y/Y in November and December, not least reflecting the intensification of the pandemic, although the closure of non-essential retailing and many services will mean that prices of many items will need to be imputed by the ONS. However, oil price base effects, as well as the end of the hospitality VAT cut will push inflation significantly higher from Q2 on, when we expect the headline CPI rate to rise above 1½%Y/Y. And before then, there is likely to be some upwards pressure on prices emanating from the increased costs of trade with the EU associated with the end of the Brexit transition period at end-2020. Of course, the extent of that pressure will depend on whether the UK concludes and implements an FTA with the EU – failure to agree and ratify such a deal would generate significant upwards pressure, through both the increased costs of doing business and weaker sterling. Thankfully, however, reports suggest that a deal looks increasingly likely next week, which would allow for ratification in December.

Small chance of an upwards revision to euro area CPI from the flash
Like in the UK, today brings the release of euro area October inflation data, in this case the final estimates. Monday’s Italian figure confirmed the flash estimate on the EU-harmonised measure of -0.6%Y/Y, up 0.4ppt from September. So, the headline euro area figure should also be confirmed at the preliminary estimate, which was unchanged from September at a four-year low of -0.3%Y/Y, despite upward revisions to the equivalent French and Spanish measures last week. The core euro area rate should similarly be unchanged at a series low of 0.2%Y/Y.

EU car registrations fall back in October, but French retail sales accelerate
Meanwhile, data released this morning confirmed that new car registrations in October fell 7.8%Y/Y in the EU to be down 26.8%YTD/Y, with registrations in the euro area down 7.4%Y/Y and 27.3%YTD/Y. The figures marked a notable deterioration from September, when sales rose above the level a year earlier as registrations marked a V-shaped recovery from the lockdowns in Q2, supported by government incentives and discounting. The weakness in October likely in part reflects the intensification of the pandemic, deterring shoppers from visiting showrooms. Indeed, new registrations were down more than 9.0%Y/Y in France and Belgium and 21.0%Y/Y in Spain. New car registrations also fell from a year earlier in Germany (-3.6%Y/Y) but were down a negligible 0.2%Y/Y in Italy.

Separately, data from the Bank of France, postponed from yesterday, suggested that French retail sales remained strong in October ahead of the closure of non-essential retailing this month. On the bank’s measure, sales rose 6.0%Y/Y, up 2.7ppts from September, with strength in sales of food (5.3%Y/Y) and non-food items (6.2%Y/Y) alike. Sales of consumer electronics, DIY-related items and games and toys were all particularly strong, with the Bank speculating that Christmas-related demand for such items was brought forward in light of concerns about the lockdown extending well into the festive season.

More homebuilding data due in the US today
Following on from yesterday’s November NAHB homebuilder index, which reported the highest level of optimism since the survey began in 1984, today brings the release of US housing starts and building permits data for October. We expect that these reports will continue to point to a surge in home construction activity, with starts likely to have increased 6.0%M/M to the highest level since February – clear evidence that the Fed’s monetary policy is stimulating the economy.

Australian wage growth slowest on record in Q3
The focus in Australia today was on the Wage Price Index for Q3, which measures developments in labour costs after controlling for shifts in worker composition. While analysts had anticipated a very soft outcome, wage growth proved even weaker than expected with the seasonally-adjusted headline index – which excludes bonuses – rising just 0.1%Q/Q. As a result, annual growth in wages slowed to a record low of just 1.4%Y/Y (this series dates back to 1997). Not surprisingly, growth was especially weak in the private sector, with wages rising just 0.1%Q/Q and 1.2%Y/Y. In the public sector – which is less responsive to market conditions – wages grew 0.2%Q/Q and 1.8%Y/Y. In the detail, while wages grew more than 2%Y/Y in the education, healthcare, utility and finance and insurance sectors, growth of 0.8%Y/Y or less was recorded in the construction, retail, wholesale, accommodation and administrative services sectors. In addition, unsurprisingly, annual wage growth was even weaker once bonus payments are included The bonus-inclusive measure increased just 1.0%Y/Y, with private sector wages up 0.7%Y/Y and public sector wages up 1.8%Y/Y.

Needless to say, the RBA will regard today’s report as consistent with its view that, for the foreseeable future, the labour market will remain a significant drag on overall inflation in the economy, thus justifying the additional policy easing announced at the beginning of this month. Attention will turn now to the October Labour Force survey, which will be released tomorrow.

Kiwi producer prices remain soft in Q3
The only economic news in New Zealand today concerned the behaviour of the PPIs in Q3. Higher energy prices contributed to a 0.6%Q/Q rebound in the index of input prices, which nonetheless were still down 0.4%Y/Y. Meanwhile, lower prices for a range of primary products – notably dairy products – resulted in a further 0.3%Q/Q declines in the index of output prices, causing annual inflation to slow 1.4pps to just 0.1%Y/Y.

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