Japan’s goods PPI inflation rises to near-7-year high

Chris Scicluna

Chinese equities follows Friday’s Wall Street gains, pandemic worries evident elsewhere
With the US retail sales and IP reports for April proving solid after accounting for historical revisions, equity investors shrugged off a surprising decline in the University of Michigan’s (UoM) measure of consumer confidence on Friday. Indeed, led by a rally in energy, technology and consumer discretionary stocks, the S&P500 closed with a strong 1.5% gain and so just 1.4% below the previous Friday’s record high. Contributing to the advance in stocks was a further decline in bond yields, with the 10Y UST closing the week at 1.63% – down 3bps on the day. This left the yield up just 5bps for the week, despite the substantial upside surprises in the CPI and PPI reports and Friday’s UoM survey reporting the highest year-ahead and 5-10-year-ahead consumer inflation expectations since 2011 (clearly weighing on consumer sentiment). Instead, bond investors appeared comforted by more soothing comments from the Fed, with the Cleveland Fed’s Mester opining, “This is not the time to be adjusting anything on policy”, instead advising “watchful waiting”.

While US equity futures have opened up the week a couple of tenths lower today, Friday’s rally on Wall Street would ordinarily have boded well for a solid start to the week for equity markets in the Asia-Pacific region. However, in a number of markets, that positivity has been more than offset by domestic coronavirus worries. This is especially so in Taiwan, where the TAIEX declined 3% amidst fears that the country – to date one of the best handlers of the pandemic – might soon be forced into a lockdown (Taiwan reported almost 400 cases over the weekend). In Japan, where there are fears that Friday’s expansion of the state of emergency to three prefectures will not be the last, the TOPIX declined a modest 0.2%. Slightly larger losses were seen in South Korea and Thailand – the latter despite a stronger-than-expected Q1 GDP report, as the NESDC nonetheless revised down its growth forecast for 2021. By contrast, China’s CSI300 has advanced 1.5%, with some softer than expected domestic activity data perhaps quelling worries that the PBoC will tighten credit conditions further (more on this data below). Stocks advanced less emphatically in Hong Kong, Singapore and Australia. Meanwhile, following further comments made by Elon Musk, Bitcoin is back in the headlines. The leading cryptocurrency added to Sunday’s 8% decline, trading below $44k for the first time in three months.

Japan’s goods PPI inflation rises to almost 7-year high in April thanks to base effects, surging commodity prices and a weaker yen
This week’s reasonably busy Japanese economic diary kicked off today with the BoJ releasing its goods PPI for April. As was the case last month the report delivered an upside surprise, with a further 0.7%M/M lift in the headline index – 0.2ppts above market expectations. So with the prior month’s increase revised up 0.2ppts to 1.0%M/M, and last April’s 1.7%M/M slump dropping out of the calculation, annual growth lifted 2.4ppts to 3.6%Y/Y – the highest reading since September 2014, with an even larger increase likely next month due to the impact of ongoing base effects.

While higher prices for scrap and waste, utilities and agricultural goods contributed to this month’s outcome, the PPI for manufactured goods still increased a solid 0.6%M/M, lifting annual inflation to 4.1%Y/Y from an upwardly-revised 1.2%Y/Y previously. The key drivers of the increase in prices for manufactured goods were mostly familiar: namely, a further 2.0%M/M increase in the price of energy products (which are now up 39.3%Y/Y) and a further 3.2%M/M increase in the price of non-ferrous metals (which are now up 35.2%Y/Y). In addition, this month also saw a 3.0%M/M increase in lumber prices and a 1.5%M/M increase in iron and steel prices (now both up 4.7%Y/Y). As in recent months, the weakening of the yen is contributing to price increases at the producer level, especially for raw and intermediate materials. Measured in yen, import prices increased a 2.4%M/M in April to the highest level since May 2019, and were also up 15.7%Y/Y. Even so, final producer good prices decreased 0.1%M/M in April, with domestic prices declining 0.2%M/M and the prices of imported final goods rising just 0.2%M/M. Final consumer goods prices fell 0.2%M/M – the first decline since January – but base effects meant that annual inflation still increased 1.1ppts to 2.4%Y/Y.

Tomorrow’s Japanese GDP report to confirm economic contraction in Q1; trade, machine orders, PMI and Reuters Tankan to cast light on prospects for Q2; CPI data also ahead
Looking ahead the remainder of the week, a fairly heavy schedule begins with tomorrow’s release of preliminary national accounts data for Q1. Largely thanks to the impact on consumer spending of the winter surge in coronavirus cases at the beginning of the quarter, our colleagues in Tokyo estimate that the economy contracted 0.9%Q/Q (3.8%AR). Tertiary activity data for March, also to be released tomorrow, should confirm that activity was recovering late in the quarter. On Wednesday, METI will release final IP data for March, hopefully confirming the surprise 2.2%M/M lift in activity indicated in the preliminary report. Of greater interest will be Thursday’s April trade report, which will cast light on whether net exports might contribute positively to GDP growth in Q2 – a contribution that may well be needed if coronavirus restrictions weigh heavily on domestic activity. Thursday will also bring the release of news on machine orders during March, which corrected lower in February following a surprisingly solid run. Information on how firms are viewing business conditions will come from Thursday’s Reuters Tankan survey for May, followed a day later by the flash PMIs for May. The later will be especially interesting, with last week’s much softer Economy Watchers survey at odds with what was a very robust April PMI reading (the latter surveyed too early to capture the current state of the pandemic in Japan). Finally, Friday will also bring the release of the national CPI for April, with the already-released advance Tokyo CPI making clear that a sharp decline in mobile phone charges will lead to a renewed weakening of inflation.

China’s domestic activity indicators point to slightly slower growth momentum in April
Today saw the release of China’s key monthly domestic activity indicators for April. In summary, while some moderation in the reported annual growth rates was expected from the very flattering rates reported in Q1, the slowdown – particularly with regard to retail spending growth – was greater than anticipated. While we would caution that interpretation of the data is clouded by the volatility caused by the pandemic, the somewhat slower growth momentum suggested by today’s data is of course consistent with the softening seen in the official PMI data at the end of last month.

Beginning with the industrial sector, total output increased 0.5%M/M in April, causing annual growth to slow to 9.8%Y/Y from 14.1%Y/Y in March. For the year to date, industrial output increased 20.3%Y/Y following a 4.9%Y/Y decline a year earlier. In the detail, manufacturing activity grew 10.3%Y/Y in April following sub-trend growth of 5.0%Y/Y a year earlier, whereas mining and quarrying activity grew just 3.2%Y/Y. On an industry basis, the standouts were electric machinery and equipment (22.6%Y/Y), metal products (21.0%Y/Y) and pharmaceuticals (19.0%Y/Y). Power generation increased 10.3%Y/Y following a negligible 0.2%Y/Y increase a year earlier.

Turning to the demand side of the economy, notwithstanding last week’s strong import data, growth in retail spending almost halved to 17.7%Y/Y in April from 34.2%Y/Y in March – over 7ppts below the consensus expectation, albeit this growth follows a drop of 7.5%Y/Y a year earlier. For the year to date, retail sales increased 29.6%Y/Y following a 16.2%Y/Y decline a year earlier. Growth in catering services, which had increased more than 90%Y/Y last month, fell back to 46.4%Y/Y (this following a 31.1%Y/Y decline a year earlier). Growth in spending on apparel more than halved to 31.2%Y/Y, while growth in spending on autos fell by two-thirds to 16.1%Y/Y.

Investment spending on non-rural fixed assets increased 19.9%Y/YTD in April, which was also slightly weaker than market expectations and down from growth of 25.6%Y/YTD in March (investment had declined 10.3%Y/YTD a year earlier). Growth in private sector investment slowed 5.0ppts to 21.0%Y/YTD, whereas growth in state investment slowed 6.7ppts to 18.6%Y/YTD. Manufacturing sector investment grew 23.8%Y/YTD, representing a relative soft outcome considering an 18.8%Y/YTD decline a year earlier. Property development increased 21.6%Y/YTD, which was down from 25.6%Y/YTD last month but actually slightly firmer than market expectations. Finally, notwithstanding the slightly weaker momentum evident in today’s activity data, the urban unemployment rate declined a greater-than-expected 0.2ppts to 5.1% in April, thus reaching its lowest level since December 2019.

In other news, today there were also further signs that Chinese home prices have begun this year on a slightly firmer note. New home prices across China’s 70 largest cities increased 0.48%M/M in April – the most since August – causing annual growth to lift 0.1ppts to 4.5%Y/Y. Existing home prices increased 0.40%M/M for a second consecutive month, causing annual growth to lift 0.1ppts to 3.4%Y/Y. As in previous months, the largest increases continue to occur in so-called first-tier cities, where existing home prices increased 0.8%M/M and 11.3%Y/Y (prices rose 12.9%Y/Y in Shenzen and Guangzhou).

There are no further economic reports scheduled over the remainder of the week. However, with the PBoC conducting today’s 1-year Medium-term Lending Facility operation at an unchanged rate of 2.95%, on Thursday the PBoC will likely confirm the 1-year and 5-year prime loan rates at 3.85% and 4.65% respectively for a twelfth consecutive month.

Flash May PMIs the main focus in the euro area this week
The most notable new euro area data this week will be Friday’s flash May PMIs. With gradual reopening underway – including the restart of outdoor service in French restaurants and cafes from Wednesday – these are expected to point to an acceleration in the pace of expansion in services with the euro area activity PMI for the sector forecast to rise about 1.5pts to 52.0, the highest since July 2020. The euro area manufacturing output PMI should also remain close to the record highs above 63 recorded in March and April. But the survey will also likely report backlogs close to record highs and continued very strong price pressures in the sector too. The euro area composite PMI should to rise from 53.8 in April to close to 55, which would be the highest since the first half of 2018, underscoring the likelihood of a firm return to positive GDP growth in Q2. Other May survey indicators due include the European Commission’s preliminary consumer confidence survey on Friday, which seems likely to report an improvement in optimism this month.

The data calendar will kick off with final inflation figures for April, with the Italian numbers out this morning followed by the euro area numbers on Wednesday. The flash estimate of euro area inflation in April rose 0.3ppt to 1.6%Y/Y, the highest since April 2019. The rise was driven principally by energy inflation, which – largely due to base effects – accelerated to the highest since October 2018. And core inflation moderated to 0.8%Y/Y. We expect the flash estimates to be confirmed – while the final estimate of French HICP inflation was revised down by 0.1ppt from the flash estimate to 1.6%Y/Y, Friday’s Spanish figures revised up the equivalent rate by 0.1ppt to 2.0%Y/Y. Among other data due, the updated estimate of euro area Q1 GDP (due tomorrow) will likely reaffirm the modest drop of 0.6%Q/Q to be down 1.8%Y/Y, while employment data for the first quarter are also due then. Other data due this week include March figures for goods trade (tomorrow) and construction output (Thursday), while April’s total new car registrations figures for the region come on Wednesday.

A busy week ahead in the UK: labour market, inflation, retail spending and flash PMIs the focus
A busy week for top-tier UK economic data brings, among other things, the latest labour market report (tomorrow) and inflation figures (Wednesday), as well as retail sales data, the GfK consumer confidence survey and flash PMIs (Friday). With the government’s Job Retention Scheme still in operation alongside pandemic restrictions, but GDP growth at the end of Q1 having been firm at 2.1%M/M, the unemployment rate could well nudge down 0.1ppt to 4.8% in the three months to March. We expect the inflation data to report a leap of 0.9ppt in the headline CPI rate to a fourteen-month high of 1.6%Y/Y in April, thanks in particular to further upward pressure from energy prices, including higher domestic fuel bills. However, we also expect a pick-up in inflation of clothing and footwear as well as services to be reflected in an increase in the core CPI measure to 1.5%Y/Y, the highest since July 2020.

With surveys such as that of the BRC having been upbeat, consumer confidence improving and non-essential stores having reopened in England from the 12th of the month, we expect to see growth of about 5%M/M in retail sales (both including and excluding auto fuel) in April, to push the level of sales close to October’s pandemic-era high, up about 6½% from the pre-pandemic level in February 2020 and some 38% above the level a year earlier. And with the economy continuing steadily to reopen – and from today, pubs, restaurants and cafes will be able to serve indoors while many indoor entertainment and leisure facilities will also be allowed to reopen – the flash PMIs should remain consistent with firm growth this month, with the composite PMI likely to remain close to April's high of 60.7, thanks not least to ongoing improvement in the services sector.

NY Fed manufacturing survey and NAHB housing index ahead today; more manufacturing survey and housing-related data to come later in the week; FOMC minutes also of note
This week’s relatively sparse US economic diary begins today with the release of the NY Fed’s manufacturing survey and NAHB housing index for May. Tomorrow will bring housing starts and building permits figures for April, with Daiwa America Chief Economist Mike Moran expects a downward correction to multi-units starts to weigh on this month’s figures, leading to a 1.7%M/M decline in total starts. On Thursday the Conference Board should report another hefty increase in its leading index for April while the Philly Fed will release its manufacturing survey for May. The week concludes with the flash Markit PMI readings for May– not a huge focus for US investors but likely to have remained very elevated nonetheless – and what Mike expects to be an uneventful existing home sales report for April. This week’s Fed speaking diary is also fairly light, but the release of the April FOMC meeting minutes on Wednesday will doubtless attract some interest.

A big week of labour market data ahead in Australia; sentiment and retail data also of note
With the RBA’s dovish policy stance tied to expected developments in the labour market, this week’s economic data flow is second only to the importance of the CPI itself. Following the release tomorrow of the minutes of this month’s RBA Board meeting, attention will quickly turn to Wednesday’s release of the Wage Price Index for Q1. After a 0.6%Q/Q increase in Q4 – the largest for five quarters – Bloomberg’s survey indicates that the median analyst expects a slightly smaller 0.5%Q/Q lift in Q1. And given the weak results seen in the middle quarters of last year, this would leave annual growth at a record low of just 1.4%Y/Y – probably no more than half the pace that the RBA is seeking to drive sustained CPI inflation consistent with its target range. Achieving that rate of wage growth will almost certainly require a further material tightening of the labour market and so Thursday’s Labour Force survey for April is also of significant note this week. While job advertising has continued to increase to very high levels, and surveyed employment intentions to record levels, this month mark’s the first since the JobKeeper programme was wound down, doubtless leading to some job losses. Even so, the consensus is looking for a solid 20k lift in employment in April, which would likely leave the unemployment steady at 5.6%.

Aside from the labour market, there are a few other economic reports of interest this week. On Wednesday, we will receive Westpac’s consumer confidence survey for May, while Friday will bring the release of the ABS’s preliminary estimate of retail sales for April. Also on Friday, we will receive the flash Markit PMIs for May, which judging from the recent NAB survey will likely at least maintain their already high April readings.

Kiwi services PMI jumps to record high in April; Budget to highlight improved fiscal position
Whereas the manufacturing PMI had pulled back from a record high in April, today we learned that the BNZ-Business NZ services PMI surged 8.3pts to set a new record high of 61.2. The activity/sales index increased 6.5pts to 62.5 and the new orders index jumped 10.0pts to 68.0. Most encouraging of all, the employment index increased 8.7pts to a record 60.8.

Looking ahead, Wednesday’s PPI for Q1 is the only economic report of passing interest due over the remainder of the week. So the domestic focus will be Thursday’s presentation of the Government’s Budget for 2021/22 and beyond. As was the case in Australia’s Budget last week, thanks to much higher than expected tax revenue, the updated figures should point to a sizeable improvement in the underlying fiscal position compared to that portrayed in December’s Half-Year Update (which was based on forecasts that were very cautious). So while the Government has indicated that it will announce some additional operating and investment spending this week, unlike in Australia, we would expect to see a material downward revision to the forecast profile of deficits, with the operating balance perhaps even getting close to surplus by the middle of this decade. As a result, the profile for debt will also be reduced leading to a material scaling back of the DMO’s borrowing programme compared to that forecast previously (gross issuance could be as much as a third lower than signaled previously, especially at the DMO has overfunded in the current fiscal year). This new profile would make it even more unlikely that the RBNZ will purchase the full $100bn LSAP envelope by the time the programme ends next year. 

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