UK CPI inflation up a little less than expected

Chris Scicluna

Equity markets mostly weaker in Asia, again led by Japan
After declining for six consecutive sessions, the greenback finally found its legs on Tuesday. Unfortunately, demand was driven by a further ramping up of risk aversion, that sent the S&P500 and Nasdaq to losses of 0.7% and 0.9% respectively and lowered the 10Y UST yield to 1.56%, erasing Monday’s rebound. The latest round of US corporate reports, while generally favourable, provided no upward impetus given already lofty equity valuations and renewed concerns that the pandemic might yet have a further sting it its tail.

Against that background, most bourses in the Asia-Pacific region have lost further ground today, with the notable exception of those in mainland China which were little changed. As was the case yesterday, the losses have been led by Japan where the TOPIX declined 2.0% to its lowest level since early March, as Tokyo’s Governor joined her Osaka counterpart in calling on PM Suga to issue a new state of emergency, with a report in the Mainichi newspaper indicating that Tokyo is seeking restrictions to apply through the forthcoming Golden Week holiday period.

Outside of Japan, key equity indices fell by more than 1½% in Hong Kong, and more than 1% in South Korea and Singapore. In bond markets, the 10Y JGB yield has fallen below 0.07%, while Australia’s 10Y ACGB fell 5bps to 1.72% despite news of a slightly larger than expected lift in retail sales in March. Bond yields fell similarly in New Zealand, with the Q1 CPI meeting expectations and Moody’s reaffirming the country’s stable top rating, citing a resilient economy, strong policy frameworks and robust fiscal buffers.

BoJ survey points to increased business loan demand due to pandemic stresses, while credit conditions continue to ease
During an otherwise quiet day for economic reports, today the BoJ released its quarterly Senior Loan Officer Survey, which amongst other things provided information on how 50 of Japan’s largest banks currently view the demand and supply of credit. In summary, the survey pointed to some impact on loan demand from the winter surge in coronavirus cases. Meanwhile, supported by BoJ and government policy measures, credit conditions have continued to gradually ease.

With respect to business lending, the diffusion index (DI) measuring changes in the demand for loans increased to 9 from -5 in the prior survey. This result was driven mainly by demand from small firms, especially in the non-manufacturing sector, and likely reflects the disruption caused by the pandemic over recent months. Indeed, the most commonly reported drivers of increased business loan demand were a decline in internally-generated funds or reduced availability of funding from other sources. Amongst those banks reporting decreased loan demand, this was attributed mainly to customers’ lack of sales and fixed investment. Looking ahead, the DI for the next three months was 5, indicating less certainty of further growth in demand. Meanwhile, in similar numbers to the last survey, banks reported an easing of credit standards on business loans, especially for loans to small firms. Where standards were eased, this reflected competitive pressures, banks’ effort to stimulate growth and other unspecified factors. Looking ahead, respondents expect to ease credit standards further over the next three months.

With respect to lending to households, the DI measuring changes in demand for loans fell to 7 from 12 in the previous survey (which had been a 4-year high). The increase was driven entirely by demand for housing loans, albeit the respective DI declined to 8 from 14 previously. Demand for consumer loans appeared to be more or less unchanged. Looking ahead, the forecast DI for the household loan demand over the next three months was just 2, indicating that very few banks expect a lift in business. As far as the supply of credit is concerned, the DI measuring changes in banks credit standards on household fell to 6 from 8 previously, indicating that on net slightly fewer banks eased their standards for these customers. The forecast DI was also 6, indicating that on net the same proportion of banks expect to ease their credit standards on household loans over the next three months.

UK CPI inflation rises slightly less than expected, as higher prices of petrol and clothing are tempered by falling food prices
UK inflation rose a touch less than expected in March, rising 0.3ppt to 0.7%Y/Y to reverse the prior month’s decline. Within the detail, there was significant variation. Unsurprisingly, prices of motor fuel were a key driver, with petrol inflation rising more than 7ppts to 3.6%Y/Y, as base effects from last year’s plunge in oil prices kicked in. In contrast, the pace of decline in prices of food and beverages accelerated 0.8ppt to -1.4%Y/Y. And while services inflation was unchanged at 1.5%Y/Y, inflation of clothes and footwear again provided some volatility, rising 1.8ppts to -3.9%Y/Y and thus reversing most of the prior month’s decline. And so, core inflation (excluding energy and food) rose 0.2ppt to 1.1%Y/Y, still nevertheless close to the bottom of the range of the past six years.

Looking ahead, energy inflation will accelerate further next month as higher domestic fuel bills compound the impact of higher petrol prices. And inflation of clothing and certain other items affected by lockdown will also pick up further in response to the gradual reopening of the economy. So, UK CPI inflation is likely to rise close to 1½%Y/Y in April, and probably average close to 2%Y/Y in the second half of the year, when the core rate is also likely to be back above 1½%Y/Y.

Australia retail sales rebound in March but little changed in Q1
The focus in Australia today was on the ABS’s release of preliminary retail sales data for March, based on responses from retailers that account for about 80% of total turnover. The good news is that following an unrevised 0.8%M/M decline in February, spending rebounding 1.4%M/M in March – a little firmer than markets had expected. With spending having temporarily surged in March last year in response to the national lockdown, annual growth slowed to 2.3%Y/Y from 9.1%Y/Y in February. Meanwhile, despite the rebound in March, retail spending over Q1 as a whole – which was impacted by several short periods of pandemic-induced restraints in some states – appears to have been little changed compared to Q4. As was the case in Q4, overall consumer spending is likely to have fared somewhat better with the softness in the retail sector reflecting the normalisation of spending patterns.

In the detail of the March results, the ABS noted sharp increases in spending of 4%M/M in Victoria and 5.5%M/M in Western Australia with booth states rebounding from lockdown restrictions during February. Spending fell slightly in Queensland, which was impacted by a short lockdown in March. Spending at cafes, restaurants and takeaway stores rebounded 6%M/M but food retailing decline 1%M/M.

Kiwi CPI rises 1.5%Y/Y in Q1, meeting market expectations
Today’s Kiwi CPI offered no surprises with the headline index increasing 0.8%Q/Q, nudging annual inflation 0.1ppt higher to 1.5%Y/Y – an outcome that was exactly in line with the consensus forecast in Bloomberg’s poll but 0.2ppts lower than the RBNZ had forecast back in February.

In the detail, tradeables prices increased 0.9%Q/Q, driven in particular by a 3.9%Q/Q rise in transport prices – the largest increase in a decade, owing to a 7.8%Q/Q rebound in the price of petrol and a 4.6%Q/Q lift in the price of used cars. Non-tradeable prices – which are more reflective of conditions in the domestic economy – increased 0.7%Q/Q and 2.1%Y/Y, which was 0.1ppts below the RBNZ’s February forecast. Unsurprisingly, housing-related price increases were a key driver with the cost of home-building rising 1.2%Q/Q and rents rising 1.0%Q/Q. As far as the core measures were concerned, the 30% trimmed mean increased 0.8%Q/Q but just 1.7%Y/Y, while the weighted median increased 0.8%Q/Q and 2.3%Y/Y. As usual the RBNZ published its own two model-generated measures of core inflation, which portray core inflation at 1.7%Y/Y and 1.9%Y/Y respectively – in each case up 0.1ppts from Q4.

Looking ahead, annual inflation is likely to lift to around 2½%Y/Y in Q2 – thus at least temporarily rising above the midpoint of the RBNZ’s 1-3% target range – as last year’s pandemic-induced 0.5%Q/Q decline is replaced by an outcome that is more reflective of an economy well along the road to recovery. However, the RBNZ has made clear that in setting monetary policy it will look through the gyrations caused by the pandemic, instead only responding to factors that will impact the medium term outlook for inflation. In that regard, the next important data in New Zealand will be the Q1 employment and wage reports on 5 May.

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