Tokyo CPI signals modest lift in core prices

Chris Scicluna

Equity markets firmer as Treasury yields stabilise
After some weakness early in the session, Wall Street regained its poise yesterday amidst the lowest initial jobless claims reading for 12 months and news of President Biden’s ambitious target of reaching 200 million coronavirus vaccinations by the end of April – double his original goal for his first 100 days in office. So, while European bourses had closed broadly flat, the S&P500 eventually gained 0.5% led by both financials and industrials although the underperformance of the tech sector left the Nasdaq with a modest gain of just 0.1%. After the close, the Fed announced that banks that perform well in the current round of stress tests would be allowed to raise dividends from 30 June, while limits on stock-buybacks imposed during the pandemic would also be removed. US equity futures have moved a little higher on this news, with banking stocks firming in after-market trade.

Sentiment in the stock market was probably also helped by another steady day in the Treasury market. The latest 7Y auction went somewhat better than the one last month that had caused a short-lived spike in yields. However, with the debt awarded 2.5bps above where the bond had traded at the bidding deadline, the 10T UST yield did move off its lows to close essentially unchanged at 1.63% (and has crept a couple of basis points higher since). Helpfully, Fed Chair Powell again displayed his dovish credentials, telling listeners to a radio interview that support for the economy would only be pulled back “very, very gradually, over time, and with great transparency, when the economy has all but fully recovered”. In FX markets, the greenback made gains against the euro and yen, but lost ground against sterling.

Against that background, during what has been a quiet session for local data, bourses in the Asia-Pacific region have had a good day. After rebounding yesterday following three days in the red, Japanese stocks again helped lead the way with the TOPIX gaining 1.5%. JGB yields nudged lower despite the advance Tokyo CPI pointing to a slight lift in core prices in March. Gains in China were even more impressive, with the CSI300 advancing 2.3% – albeit still down 3.3% for the year to date – and both the Hang Seng and TAIEX gaining over 1.5%. In China some attention was drawn to a PBoC research paper reporting that China’s potential annual growth rate during the 2021-25 period is in the range of 5.0-5.7% – somewhat below the rate that China has been accustomed to, with the contribution from an increasing labour supply estimated to be gradually weakening.

Tokyo CPI signals modest lift in core prices in March
The only economic report in Japan today was the advance CPI report for the Tokyo area, which pointed to a modest lift in core prices in March that was not anticipated by the market (perhaps not surprisingly, given that core prices have barely moved over the past six months outside of the impact of the suspension of the Government’s ‘Go-to” travel subsidies). The headline CPI index increased a seasonally-adjusted 0.2%M/M, which given base effects was sufficient to cause annual inflation to increase 0.1ppts to -0.2%Y/Y (in line with the consensus estimate in Bloomberg’s survey). Prices for fresh food declined 2.8%M/M and so were down 1.7%Y/Y, rather than up 0.1%Y/Y as was the case in February. However, declines of this magnitude are not unusual at this time of the year, and so the BoJ’s forecast measure of core inflation – which excludes fresh food – also increased 0.2%M/M in March, while annual inflation on this measure increased 0.2ppts to an 8-month high of -0.1%Y/Y.

Elsewhere in the CPI, higher prices for fuel drove an overall 2.0%M/M lift in energy prices in March, causing the annual decline in energy prices to moderate 2.0pts to 7.8%Y/Y – a theme that will continue over coming months as last year’s declines in fuel and electricity prices drop out of the calculation. Therefore, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – increased a smaller 0.1%M/M, albeit still sufficient to causing annual inflation to lift an unexpected 0.1ppts to 0.3%Y/Y. The narrower measure of core prices used overseas – which excludes all food and energy – also increased an unexpected 0.1%M/M, lifting annual inflation on that measure by 0.1pts to an 8-month high of 0.4%Y/Y.

Goods prices increased 0.1%M/M in March but were down 0.6%Y/Y, although industrial product prices increased 0.5%Y/Y despite lower fuel prices. Services prices increased 0.1%M/M in March, assisted by a rebound in prices related to recreation and culture (for example, hotel charges increased 1.0%M/M but were unchanged from a year earlier). As a result, inflation in the services sector lifted 0.1ppts to a 0.2%Y/Y – still 0.7ppts below the cyclical peak reached in early 2019.

UK retail sales post modest gain in February after steep drop at start of 2021
This morning’s UK retail sales figures came in pretty much as expected. Following a drop of 8.2%M/M in January, total sales volumes rose 2.1%M/M to be down 3.7%Y/Y, still weighed by the ongoing closure of non-essential retail. Non-food stores rose 4.1%M/M, a rather modest gain after the drop of almost one quarter the prior month, to be down almost 24% from a year earlier just before the pandemic hit. Nevertheless, there were strong increases of more than 16%M/M in department stores and household goods stores as consumers bought more stuff for their homes, with the latter category now up 5.1%Y/Y. And food store sales rose 2.8%M/M to be 7.6%Y/Y.

In marked contrast, despite significant discounting that weighed significantly on inflation that month, sales at clothes retailers fell almost 10%M/M to be down more than 50%Y/Y. And sales at petrol stations fell 0.9%M/M to be down 26.5%Y/Y as travel restrictions continued to hit sales in that sector. But the share of sales online rose further to a series high of 36.1% up from 20.0% a year earlier. Yesterday’s CBI survey suggests that we should expect little improvement to total sales in March before a rebound in sales next month after non-essential stores reopen from the 12th onwards.

German ifo indices likely to add to the week’s more upbeat euro area surveys
Later this morning, the latest German ifo business sentiment survey is expected to reveal a further pickup in optimism at the end of the first quarter, repeating the messages of the flash PMIs and other surveys this week, which admittedly might be somewhat misleading given the recent tightening of pandemic containment measures and increased coronavirus case numbers. The ifo current assessment balance is forecast to rise a little less than 1pt in March to 91.3, still however some way below the pre-pandemic level of 98.7 and an average of 102.6 in the five years to February 2020. The expectations balance, meanwhile, is also expected to rise almost 1pt, to 95.0 – further above the pre-Covid level of 92.9 but still below the average in the five years before the pandemic.

A reasonably busy day ahead for US data, with personal spending, advance trade and core PCE deflator of particular note
This week’s US diary will conclude today with news on personal income, consumer spending, the core PCE deflator and merchandise trade for February, as well as the final results of the University of Michigan’s consumer survey for March. After being pumped up by stimulus payments in January, personal income will doubtlessly have fallen steeply in February. And Daiwa America Chief Economist Mike Moran expects a 0.7%M/M decline in personal spending, reflecting some payback from the stimulus-driven 2.4%M/M lift recorded in January. Unfortunately for the Fed, a likely 0.1%M/M increase in the core PCE deflator will do no more than leave annual inflation steady at a low 1.5%Y/Y. Meanwhile, today Mike also anticipates the reporting of a slightly wider merchandise trade deficit in February but a modest upward revision to consumer sentiment thanks to the passage of President Biden’s American Rescue Plan.

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