Japan’s trimmed mean inflation rate nudges back to negative territory

Chris Scicluna

Equity markets rally as dovish Fedspeak helps nudge Treasury yields lower
Wall Street made a strong start to the week yesterday, with a rally in technology and communications stocks helping to lift the S&P500 by 1.0% – now less than 1% below its record high – and the Nasdaq by an even greater 1.4%. US Treasury yields drifted lower, with the 10Y closing down 2bps lower at 1.60%. While Kansas Fed President George (a well-known hawk) said that she wasn’t inclined to dismiss the importance of recent high inflation readings, Governor Brainard, the Atlanta Fed’s Bostic and the St Louis Fed’s Bullard played down the likelihood that the rise in inflation would prove enduring. In FX markets, the greenback lost some ground, especially against the euro and Antipodean currencies. Meanwhile, after falling in Asia after China expressed concern about excessive speculation, industrial metals recovered to close higher on the day.

US equity futures have nudged a few tenths higher in Asia today, reinforcing the positive backdrop for markets in the region. That backdrop was especially evident in China, where the CSI300 has advanced 3.0% even as the offshore yuan extended yesterday’s gains against the USD, moving through 6.4/$ for the first time since 2018. Gains of over 1.5% were also seen in stocks in Hong Kong and Taiwan, while the KOSPI advanced 0.9% as consumer confidence hit a 3-year high ahead of Thursday’s BoK policy meeting. The TOPIX increased just 0.3%, however, as the US issued a do-not-travel advisory for trips to Japan, raising further questions about whether the Olympics will take place as scheduled from 23 July. However, the US Olympics and Paralympics committee expressed confidence that the mitigation practices planned by organisers would be sufficient to keep participants safe, as did officials in Tokyo.

In Australia, the ASX200 increased 1.0%, with the rebound in metals prices helping to boost materials stocks, but ACGB yields followed UST yields lower. Preliminary Aussie trade data for April saw exports eke out a new high, thanks to record exports of metal ore. Less positively, in response to a small cluster of new community coronavirus cases, public gathering restrictions have been reintroduced at least temporarily in Melbourne, with quarantine-free flights from there to New Zealand also suspended.

Japan’s trimmed mean CPI inflation rate nudged down to -0.1%Y/Y in April
On an otherwise quiet day for Japanese data, today the BoJ released its analytical measures of underlying inflation that, unlike the regular measures of core inflation, are little-impacted by extreme relative price shifts such as the steep decline in mobile phone call charges that occurred in April. The trimmed mean inflation rate, which the BoJ regards as best correlated with the state of the economy, declined 0.1ppt to -0.1%Y/Y. This compares favourably Bank’s preferred exclusion-based core measure (CPI ex fresh food and energy), which fell 0.5ppt to -0.2%Y/Y. The weighted median lift in prices was steady at 0.1%Y/Y, as was the modal increase. Meanwhile, the net proportion of items recording a price rise over the past year edged down to 11.3%, thus continuing to run at about half the pace seen prior to the pandemic.

UK public finances data come in close to expectations with drop in deficit from a year ago; first survey of retail sales in May to come later this morning
In line with expectations, UK public sector net borrowing (excluding banks) came in £31.7bn in April, down from the record high of £47.2bn recorded in the same month last year but unsurprisingly still the second highest deficit for April on record. The improvement from a year ago reflected both stronger revenues and lower public spending. Indeed, central government receipts rose £3.8bn (7.0%) compared with April 2020, while central government expenditure was down a larger £12.9bn (11.9%) from a year earlier. Updated estimates revised down total borrowing over the past fiscal year by £2.8bn (0.2ppt) to £300.3bn (14.3% of GDP), still comfortably a record high in nominal terms and the highest since 1946 as a share of national output.

Looking ahead, the CBI’s latest Distributive Trades Survey will be released to give the first indication of the strength of retail sales in May. Following an extreme surge in spending in April (up 9.2%M/M on the official ONS series to a clear series high as non-essential stores reopened), sales are likely to have remained relatively elevated this month. While appalling unseasonable weather will have weighed somewhat, the reopening of indoor dining in restaurants appears to have support evening footfall.

German ifo survey likely to add to evidence that economic recovery is underway
Consistent with Friday’s flash PMIs, Germany’s ifo business survey due later this morning should point to progress with recovery in the euro area’s largest economy. In particular, with new cases of Covid-19 falling, more than 44 million vaccine doses administered and so certain states starting to ease restrictions, the services PMI rose 2.9pts to a ten-month high of 52.8, consistent with positive growth. And while supply bottlenecks saw the manufacturing output PMI slip back almost 5pts on the month, at 62.7 it was still historically high and consistent with strong expansion in the sector. Meanwhile, this morning’s updated German GDP data made a trivial revision to the size of contraction in Q1, which was just 0.1ppt bigger than previously thought at 1.8%Q/Q. On a working-day adjusted basis, that left German GDP down 3.1%Y/Y and 5.0% below the pre-pandemic level in Q419. Private consumption explained the drop in overall output in Q1, falling 5.4%Q/Q in response to the tighter pandemic containment measures. Construction investment (up 1.1%Q/Q) provided some offset while investment in machinery and equipment was little changed (-0.2%Q/Q). With imports (3.8%Q/Q) outpacing exports (1.8%Q/Q), net trade subtracted 0.6ppt from growth, but inventories added 1.4ppts.

Conference Board consumer survey, housing indicators and Richmond Fed manufacturing survey ahead in the US today; some Fedspeak also scheduled
Today’s key US economic report is the Conference Board’s consumer survey for May. Daiwa America Chief Economist Mike Moran thinks that after increasing sharply over the previous two months, the headline index is at risk of a modest pullback given the inflation concerns expressed in the preliminary University of Michigan consumer survey results released earlier this month. As always, the jobs plentiful indicators from this survey will also be of interest, especially in light of the smaller-than-expected payrolls gain in April. Also today, Mike expects new home sales to report a modest 2.1%M/M pullback in April from what was a 15-year high in March, while the S&P CoreLogic and FHFA home prices measures for March will doubtless continue to portray upward pressure. The Richmond Fed’s manufacturing survey for May completes today’s dataflow. Meanwhile Fed Presidents Barkin and Evans will speak on the economic outlook and Governor Quarles will testify before the Senate Banking Committee.

Aussie merchandise exports nudge up to record high in April, imports decline
Today the ABS released preliminary merchandise trade figures for April. In unadjusted terms (no seasonally-adjusted data are released), exports were little changed from March – a good result in an Easter-impacted month. However, the fractional gain was sufficient to drive a new record high that was also up 16%Y/Y. Exports of non-rural goods increased 0.2%M/M and 17%Y/Y, with exports of metal ores setting a new record high. Exports of rural goods fell 4%M/M but increased 16%Y/Y, while exports of non-monetary gold fell 16%M/M and 6%Y/Y. Meanwhile, imports declined a preliminary 7%M/M in April, lowering annual growth to 8%Y/Y, with capital, consumption and intermediate goods all lower for the month but higher than a year earlier. These preliminary figures – which the ABS will discontinue from June – indicate an unadjusted merchandise trade surplus of A$10.1bn in April – A$1.9bn larger than last month and around A$3.0bn larger than in the same month a year earlier. Allowing for seasonality and likely developments in services trade, this suggests that the full trade report will indicate a seasonally-adjusted trade surplus of around A$9.0bn in April – if so the third largest on record.

In other Aussie news, the weekly ANZ-Roy Morgan consumer confidence index increased 1.5% last week to 114.2, thus narrowly surpassing the post-pandemic high recorded last month. Most of the improvement owed to respondents perceiving an improvement in their financial situation and greater optimism regarding the prospect of further improvement over the year ahead. Meanwhile, the ABS’s tax-based payrolls indicator reported a 0.5% decline in payrolls jobs over the fortnight to 8 May (and 0.4% in the month to 8 May). But given that a national lockdown was in full swing this time last year, payroll jobs were up 8.7%Y/Y. 

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