Japan’s services producer prices rise

Chris Scicluna

Strong US data lifts Wall Street on Friday; Asian bourses mixed today as central bank direction awaited
Upon news of the strongest Markit PMI readings on the series and the most new home sales since 2006, and following surprisingly firm PMI reports in Europe, on Friday Wall Street shrugged off the worries that had been triggered by the prior day’s suggestion that President Biden would soon seek to ramp up the capital gains tax paid by very high income earners. Indeed, the 1.1% advance in the S&P500 left the index just shy of the prior Friday’s record high, while the Nasdaq advanced 1.4%. The rebound in sentiment saw the 10Y UST yield lift a modest 2bps to close the week at 1.55%, while the absence of risk aversion was reflected in a weaker greenback.

Against that background, and during a quiet session for local economic news, bourses in the Asian-Pacific region have generally been mixed today with investors perhaps awaiting direction from the BoJ and Fed over the coming couple of days. In Japan the TOPIX edged up 0.2%, with PM Suga pledging to keep tacking the pandemic as his top priority after three weekend by-elections were all won by candidates from the main opposition Constitutional DPJ (although the LDP had not fielded a candidate in Hokkaido) – a result that will discourage Suga from seeking an early General Election ahead of the required date in October. In Kore and Taiwan, stocks made larger gains. But in mainland China, the CSI300 is down about 1%, while bourses in Hong Kong and Singapore were little changed despite the announcement of a much-awaited travel bubble to commence on 26 May. Aussie stocks and bonds were also little changed while Kiwi markets were closed for a holiday.

Japan’s services PPI rises 0.7%Y/Y in March as advertising prices and hotel charges rebound
A quiet start to the week in Japan brought only the release of the BoJ’s services PPI report for March, which proved stronger than anticipated by the few respondents to Bloomberg’ survey of analysts. In headline terms the index increased a solid 0.7%M/M, which also caused the annual rate of inflation to lift 0.7ppts to a 6-month high of 0.7%Y/Y. The most significant contributor to the lift in annual inflation was advertising services – always a volatile component – with prices rising 6.4%Y/Y compared with just 0.4%Y/Y in February. Hotels charges fell 18.2%Y/Y, but this was much smaller than the 31.5%Y/Y decline registered in February, while other notable contributions included a rebound in ocean freight charges and the price of non-office rental space.

BoJ meeting and Outlook Report ahead tomorrow, with key March activity indicators and April Tokyo CPI to follow later in the week
Looking ahead to the remainder of this week, tomorrow will bring the announcement of the outcome of the BoJ Board’s latest review of policy, together with the release of the Bank’s updated Outlook Report. Following the policy tweaks announced at the last meeting – notably the slight widening of the permitted trading range for the 10Y JGB and the deletion of the explicit target for ETF purchases – there is little prospect of any change in the Bank’s policy settings at this meeting. So the main focus will be on the updated forecasts in the Outlook Report and Governor Kuroda’s post-meeting press conference to see how the Bank’s optimistic medium-term outlook has evolved in light of the pickup in local coronavirus cases and recent re-imposition of restrictions on activity in four prefectures, which has certainly increased the likelihood that the economy will contract for a second consecutive quarter in Q2. Coming off FY20 contraction that seems likely to have been slightly smaller than the Bank had projected back in April, the Bank will probably do little more than tweak its previous forecasts of 3.9%Y/Y in FY21 and 1.8%Y/Y in FY22, while this report will also see the Bank produce its first forecast for FY23. The Bank’s inflation forecasts will probably also be little changed from the 0.5%Y/Y and 0.7%Y/Y previously projected for FY21 and FY22, while the first forecast for FY23 may show the Bank getting halfway to its 2% inflation target. In the press conference we expect Kuroda to state that the Bank is monitoring developments closely and that the Board stands ready to ease policy further if necessary. The meeting will also be notable as the first to be attended by new Policy Board member Asahi Noguchi, former academic and keen supporter of aggressive monetary easing policies.

On the data front, Wednesday will bring news on retail sales during March. After posting a solid 3.1%M/M bounce in February, growth is likely to have been moderate but annual growth will likely rise sharply to over 4%Y/Y due to base effects associated with the onset of the pandemic. Following Thursday’s Showa Say holiday, a very busy Friday will bring a number of important activity, sentiment and inflation indicators. As foreshadowed by firms, following a very strong start to the quarter, IP will have likely declined for a second consecutive month in March while still leaving output up around 1½% in Q1. Of equal interest will be firms forecast for output over the next two months, with the previous survey pointing towards expectations of a bumper April. The other key activity indicators on Friday are the household employment survey for March – which will likely point to continued resilience – and news on housing starts and construction orders in March. On the sentiment front, Friday will also bring the final manufacturing PMI report for March and the Cabinet Office consumer confidence index for April (the latter surely at risk of slippage given developments in local virus cases). Finally, the advance Tokyo CPI for April is likely to depict much the same picture as March, with headline inflation still marginally in negative territory but the BoJ’s preferred core measure – CPI ex fresh food and energy – remaining near last month’s 9-month high of 0.3%Y/Y despite downward pressure mobile phone charges.

Official PMI readings the focus in China this week
This week’s Chinese economic diary is once again sparsely populated. Following tomorrow’s release of corporate profit data for March, attention will turn to Friday’s release of official PMI readings for April. Both the manufacturing and non-manufacturing PMIs rebounded in March – the strength of the latter foreshadowing a pick-up in retail spending – and investors will be hoping that most of that momentum has carried through to April.

Today’s German ifo indices should be little changed; euro area Q1 GDP data to confirm second successive modest decline in output, while flash CPI data will report further rise in euro area inflation but soft core measure

Following Friday’s upbeat flash PMIs, this morning’s German ifo survey indices should also be consistent with broad resilience of the German economy to the current pandemic containment restrictions, as should the Commission’s comprehensive sentiment survey indicators on Thursday. But the most notable data from the euro area this week will be the first estimates of Q1 GDP and April inflation. In particular, Friday will bring Q1 GDP figures for the euro area, Germany, France, Italy and Spain. Following a smaller-than-feared contraction of 0.7%Q/Q in Q4, we forecast a further decline in euro area GDP of 0.8%Q/Q in Q1 due to the intensification of the pandemic and re-imposition of lockdown measures. But the range of possible outturns is wide, and probably skewed to the downside. Among the member states, we forecast declines of around 1.0%Q/Q in Germany and Spain, where GDP held up in Q4. After a fall of 1.4%Q/Q in Q4, French GDP might be little better than flat. And we forecast a contraction in Italian GDP of around 0.5%Q/Q following the steeper drop of 1.9%Q/Q in Q4. In terms of the flash estimates of inflation in April, the German and Spanish data will be published on Thursday, followed by the euro area, French and Italian numbers on Friday. We forecast the headline euro area CPI rate to rise 0.2ppt to 1.5%Y/Y in April but core inflation to drop 0.2ppt to 0.7%Y/Y as pandemic restrictions continue to weigh on prices of consumer-facing services. The risks to those forecasts, however, are skewed to the upside.

A quieter week lies ahead for economic data from the UK
In contrast to the euro area, this week will be relatively quiet on the UK economic data front, with no top-tier releases scheduled. Nonetheless, tomorrow’s CBI distributive trades survey for April will be of some interest. With Covid containment measures gradually easing – and non-essential stores having reopened from the twelfth of the month – the survey should point to further strong growth in sales after an upside surprise in March.

A busy US diary highlighted by an FOMC meeting, Q1 GDP estimates, March inflation and the peak week for corporate reporting

Investors have plenty on their plate in the US this week, including Wednesday’s FOMC meeting, a number of important economic releases and corporate earnings reports from more than a third of the companies that comprise the S&P500. Starting with the Fed, in the opinion of Daiwa America’s Chief Economist Mike Moran, and reflecting prior comments made Fed Chair Powell, there is no realistic possibility of the Fed changing any of its key policy settings at this meeting (indeed, at any meeting in the near future). Rather, most of the focus will be on the post-meeting statement and the subsequent press conference to see whether the Fed’s medium-term view is evolving in a way that might signal the possibility of the earlier policy tightening when the next set of projections are prepared prior to the FOMC’s June meeting.

The Committee is likely to offer an optimistic view on the outlook, one more upbeat than the guarded view provided at the March press conference and more in keeping with the bright outlook in Powell’s television interview on 60 Minutes. At the same time, Powell is likely to emphasize that the labour market is still far from normal and that any pickup in inflation that accompanies the recovery is likely to be transitory. Powell will stop short of suggesting any near-term change in policy, although the positive outlook will support the view of many market participants that the Fed will begin to taper its QE programme next year, and some might pull the expected date of the first rate hike into 2022.

Separately, there is an outside chance that policymakers will take action to try to push up money market interest rates from their current rock-bottom levels, and prevent them drifting into negative territory, e.g. by raising the interest rate paid on excess reserves (IOER) and/or the interest rate on reverse repurchase agreements (RRPs). On balance, however, Mike thinks this is unlikely unless and until the fed funds rate drops as low as 5bps.

Ultimately, the Fed’s key policy parameters will go where the data lead them and there are a number of important economic reports due this week. The diary begins today with the release of the advance durable goods orders report for March, which Mike expects will show a solid 1.5%M/M lift in total orders as the impact of supply chain disruption is trumped by a rebound from the weather-related constraints seen in February. Tomorrow the Conference Board will release its consumer survey for April. Wednesday will bring advance merchandise trade and inventory data for March, with both exports and imports to lift from their weather-impacted February readings, but with the rebound in exports likely sharper to lead to a modest narrowing of the trade deficit. This will be followed a day later by the advance GDP report for Q1. Given the impetus from two waves of federal stimulus payments, despite a weather-impacted February, Mike expects a 6.0%AR lift in activity during the quarter. Growth will likely be driven mostly by consumer spending and residential investment, whereas net exports and inventories likely subtracted from growth. Thursday will also bring news on pending home sales as well as the weekly jobless claims report.

A busy Friday is highlighted by the personal income and spending report for March. Mike expects stimulus payments to boost personal income by a whopping 20%M/M, while personal consumption likely increased 2.5%M/M. Inflation from the CPI points to an above-average 0.3%M/M lift in the core PCE deflator. Also of note is the release of the Employment Cost Index for Q1, which Mike expects will report a 0.7%Q/Q advance – back within the pre-pandemic range. The Chicago PMI for April and the final results of the University of Michigan’s consumer survey for April round out the diary.

Inflation focus in Australia this week; trade and private credit data also due
There were no economic reports of any note in Australia today. Over the remainder of the week, and with one eye on next week’s RBA meeting, the key focus will be on inflation. On Wednesday, the CPI will likely report a solid increase in Q1 – Bloomberg’s survey reports a consensus forecast of 0.9%Q/Q – not least due to a rebound in energy prices. This outcome would lift annual inflation by 0.5ppts to 1.4%Y/Y – still well below the midpoint of the RBA’s 2-3% target due to the steep 1.9%Q/Q decline in prices in Q2 last year (this will roll out of the annual inflation calculation next quarterly, lifting headline inflation temporarily above the Bank’s target range). As always, most interest will centre on the RBA’s favoured analytical measures of core inflation. That said, at this early stage, these measures are unlikely to point to price pressures consistent with confidently achieving the Bank’s inflation target over the medium-term (a 0.5%Q/Q lift in the trimmed mean, as expected by the market, would likely leave annual inflation steady at just 1.2%Y/Y).

Aside from the CPI, this week’s other key reports are the preliminary merchandise trade figures for March (also Wednesday), the external price indices for Q1 (Thursday) and the PPI for Q1 and private sector credit data for March (Friday). Given the proximity of the next Board meeting, there are no RBA events scheduled during the week.

Kiwi sentiment indicators and trade data ahead this week
With markets closed in observance of the ANZAC Day holiday, there were no major economic indicators released in New Zealand today and the local diary over the remainder of the week is unlikely to be a major driver of domestic markets. On Thursday, we will receive the merchandise trade report for March and the final results of the ANZ’s Business Outlook survey for April. The ANZ’s consumer confidence reading for April will follow on Friday, which amongst other things will capture the impact on sentiment of government policy announcements designed to slow the housing market. 

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