Tokyo CPI points to small lift in core inflation

Chris Scicluna
Emily Nicol

Markets mixed on Tuesday as outcome of key risk drivers awaited
Wall Street began the week as it had left off on Friday, with sentiment in European equity markets boosted too thanks not least to ECB President Lagarde’s pledge to further support the euro area recovery if required and recognition that the ECB is “clearly” far away from its inflation goal. But on a day when, according to John Hopkins University, the pandemic death count topped 1 million people – with the true toll likely much higher – Asian equity markets were somewhat mixed today. While benchmark indices moved higher in China and Korea, Japan’s Topix fell back towards the close to end the day down 0.2% while stocks were also weaker in Hong Kong. US equity futures have also now moved lower even after House Democrats released a US$2.2trn fiscal stimulus proposal – one that is probably still unacceptable to the Administration and Republican senators. And European equities have started the day in reverse, with European govvies a touch firmer commensurate with the weaker risk appetite.

There was little in the way of decisive macro news from the Asia-Pacific region (although the latest Tokyo inflation data suggested an increase in core inflation this month), leaving investors awaiting direction from some of this week’s obvious potential risk drivers, including tonight’s US Presidential debate. Before then, the German flash inflation estimate for September will be closely watched ahead of the euro area release on Friday – Spain’s figures just released showed no change from last month. And the European Commission’s sentiment survey will provide an update on conditions across the region in light of the recent surge in coronavirus cases in certain key member states – we expect the findings to be less alarming than last week’s flash PMIs and indeed this morning’s French consumer survey pointed to stability rather than deterioration.

Japan - Tokyo CPI points to small lift in core inflation in September
The only significant economic data released in Japan today concerned the behaviour of consumer prices in the Tokyo area. After adjusting for seasonality, the headline CPI index declined 0.1%M/M in September, led by lower prices for fresh food, causing annual inflation to ease by a further 0.1ppt to a 5-month low of 0.2%Y/Y. However, the core index forecast by the BoJ, which excludes fresh food prices, was unchanged during the month so that annual inflation on this measure rose 0.1ppt to -0.2%Y/Y. Moreover, with energy prices falling 1.6%M/M, the narrower measure of core prices preferred by the BoJ – which excludes fresh food and energy – rose 0.1%M/M, causing annual inflation on this measure to rise 0.1ppts to 0.0%Y/Y. And the even narrower measure of core prices used in many other countries, which excludes all food and energy prices, rose 0.2%M/M causing annual inflation in this measure to rise by 0.3ppt to -0.2%Y/Y.

In the detail, after declining sharply last month – due to the Government’s ‘Go-to-Travel’ subsidies – hotel charges fell a further 9.7%M/M in September. However, that decline was less than usually seen in September – as seasonal discounts wind down – causing the annual drop in prices to ease to 30%Y/Y from 32%Y/Y in August. This contributed to an easing in service sector deflation to 0.8%Y/Y from 1.0%Y/Y previously. Good prices inflation eased 0.5ppt to 1.4%Y/Y, thanks to lower food prices, but inflation for industrial products remained steady at 1.3%Y/Y.

Of course, this month annual inflation on all of these measures continued to be boosted by last year’s hike in the consumption tax. However, that hike will begin to roll out of these figures next month. As a result, all else equal, annual inflation can be expected to move about 0.2ppt lower in October. And with the Government soon expected to extend its support for the hospitality sector with a new “Go-to-Eat” campaign, providing a 25% discount on restaurant meals, the BoJ will continue to have its work cut out to raise inflation expectations and, ultimately, inflation. In any case, the Summary of Opinions from this month’s BoJ Board meeting, also released today, made clear that the near-term focus of the Bank remains on supporting the post-pandemic recovery of the economy, including supporting corporate financing and job retention.

Euro area – French consumer confidence stable despite revival in pandemic
This morning’s French INSEE consumer confidence indicators defied downbeat expectations to suggest that household sentiment was little changed in September despite a doubling of the average number of daily coronavirus cases, to around 10k, during the survey period (26 August-17 September). Indeed, the headline index moved sideways at August’s upwardly revised reading of 95, although this still remains below the long-run average and well below the pre-pandemic highs (104) reached earlier in the year. Within the detail, French households were a touch more optimistic about the economic outlook and their future financial situations, with the index for the latter rising back above the long-run average for the first time since February. This notwithstanding, the share of households assessing it a suitable time to save increased further for the fifth consecutive month and to its highest since early 2013. This might be unsurprising given that households’ fears about near-term unemployment remained extremely high. And so, perhaps inevitably, there was also little improvement in the share of households that assessed it an appropriate time to make major purchases.

Among a number of further economic releases due from the euro area today, the Commission’s sentiment survey will be watched for further signs of a possible pause in the recovery in light of the spike in coronavirus cases. Last week’s flash PMIs showed notable variation in conditions between sectors and countries at the end of Q3, with the services sector seemingly hit significantly in light of renewed containment measures. But some of the national business surveys published last week, including the German ifo, French INSEE and Italian ISTAT reports, still signalled ongoing improvement in conditions in September, and that seems likely to be the main message from today’s Commission indices.

Euro area – Spanish inflation unchanged ahead of flash German figures
Ahead of what will be a closely watched euro area flash CPI estimate (Friday), today will also bring the equivalent September figures from Germany. Expectations are for headline German inflation on the EU-harmonised measure to have moved sideways at -0.1%Y/Y. The early data from the regions have showed a further modest decline in inflation in North Rhine-Westphalia (down 0.1ppt to -0.3%Y/Y) but steady inflation In Saxony (unchanged at 0.1%Y/Y). A flat German rate would tally with the Spanish figures, just released, which showed headline inflation on the headline EU-harmonised measure unchanged at -0.6%Y/Y in September despite a softer pace of decline in energy prices.

Meanwhile, with tourist visitor numbers hit by the pandemic, Spain’s retail sales figures for August, also released a little while ago, unsurprisingly suggested that spending remained below pre-pandemic levels in the summer. Sales on an adjusted basis dropped 2.4%Y/Y, having been down 3.9%Y/Y the previous month. With the spread of Covid-19 having intensified over recent weeks, and some local restrictions on activity having been reimposed, we expect to see a renewed deterioration in Spanish sales in September.

Australian consumer confidence improved to 3-month high last week
The ANZ-Roy Morgan index of consumer sentiment increased 1.6pts to a 3-month high of 95.0 last week. The rise in the headline index was led by a large improvement in respondents’ perception of the year-ahead outlook for the economy, with the relevant index rising 6.6pts to 70.8 – albeit still almost 20pts below its pre-pandemic level. Yesterday’s relaxation in Melbourne of stringent stage four lockdown restrictions, including the 9pm to 5am curfew, might be expected to give a further boost to sentiment this week.

UK – bank lending figures to come
Today brings arguably the most noteworthy UK release of the week, with the BoE’s latest bank lending figures for August. These are expected to show that loan demand from SMEs remained strong, while larger firms continued to access large-scale finance through other channels. Lending to households is also expected to have picked up, supported not least by a further increase in demand for mortgage lending.

US – televised Presidential debate in focus
The main focus in the US today will be the first televised presidential candidate debate between Donald Trump and Joe Biden, which seems bounds to attract plenty of attention with the weekend’s NY Times reports on how much (or little) income tax the President has paid over recent years adding a touch more spice. In terms of economic data, the advance goods trade figures for August are scheduled for release, alongside September’s Conference Board’s consumer confidence survey. Exports are expected to have recovered some lost ground, but that is unlikely to stop net trade from acting as a drag on growth in Q3. And consumer confidence seems likely to remain broadly stable, with incremental improvement in the labour market likely to offset the impact of recent turbulence in the equity markets.

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