Tokyo CPI reports a lift in core prices, but annual inflation rate still negative

Chris Scicluna

Asian equities mostly firmer today, led by Japan, even as bond yields creep higher ahead of today’s key US inflation data
While US GDP growth was unrevised at 6.4%AR in Q1, a much steeper than expected increase in core capex orders in April – despite the headline being dragged lower by soft transportation orders – and another decline in initial jobless claims pointed to a US economy in good shape in Q2. But with the 10Y UST yield rising 4bps to 1.61% ahead of today’s release of the core PCE deflator – the Fed’s preferred inflation metric – the S&P500 closed just 0.1% higher. The rebound in bond yields provided only a modest boost to the greenback, sending ¥/$ towards 110. Since the close S&P minis have gained around 0.2% as investors continue to digest yesterday’s NY Times report suggesting that President Biden will today unveil a Budget plan to boost federal spending to more than $6trn and the federal deficit to $1.8trn over the coming year. According to the report, Biden’s longer-term plan would leave the US with average deficits over the next decade of more than $1.3trn and push the debt/GDP ratio to 117% in 2031.

Turning to Asia, much of the focus today has been on a statement released late yesterday by the PBoC. Following the Bank’s earlier attempt to warn against illegal speculative activity driving up commodity prices, the Bank warned that “Enterprises and financial institutions should adapt to a two-way fluctuation of the exchange rate” – a comment that suggested discomfort with the pace of yuan appreciation and a reticence to use it to offset the impact on inflation of rising commodity prices. Despite that statement and a weaker-than-expected fix today, the yuan quickly moved through yesterday’s highs while China’s stock market fell more than ½%. By contrast, likely boosted by a weaker yen, Japan’s TOPIX rallied 1.9% today to a more than 2-week high. That rally, which was led by materials and industrial stocks, came even as the government confirmed that it would extend the state of emergency in nine prefectures to 20 June (to be formally confirmed by PM Suga shortly in an evening news conference). Investors also ignored April labour market data, which provided clear evidence that the current restrictions are weighing on activity (see below). Gains elsewhere were less impressive, but bourses in Taiwan and Australia advanced by more than 1%. Meanwhile, following the lift in UST yields, the 10Y AGCB yield increased 7bps to 1.69%.

Japan’s unemployment rate rises in April as trading restrictions weigh
Today’s Japanese activity news concerned the labour market, with the MIC and MHLW releasing data for April. MIC’s household-based survey pointed to a further impact from the pandemic-related trading restrictions, with employment declining by a further 260k. With employment having slumped by more than 1mn in April last year, base effects meant that annual growth in employment increased 1.2ppt to 0.4%Y/Y. More meaningfully, the level of employment in April was 1.3% lower than in February 2020. Unsurprisingly, the decline in employment over the latter period owes mostly to job losses in the hospitality sector (down more than 500k) and the retail and wholesale sector (-390k), with partially offsetting gains reported in the health-related services sector and in the information/communication services sector.

Given the soft result for employment and only a modest 30k decline in the labour force, the unemployment rate increased a larger than expected 0.2ppt to 2.8%. This reversed most of the unexpected decline that had occurred in March, which sadly had owed to a steep 330k decline in the estimated labour force as job searching activity was impacted by rising coronavirus cases. The male unemployment rate increased 0.4ppt to a 3-month high of 3.2%, but with women leaving the labour force the female unemployment rate edged down 0.1ppt to 2.3%. Meanwhile, the MHLW reported that the effective jobs-to-applicant ratio declined 0.01ppt to 1.09 in April. The total number of job applicants increased 2.6%M/M and was up 17.5%Y/Y, whereas the number of new job offers grew just 1.4%M/M and was down 1.4%Y/Y. After rising sharply in March, the number of newly registered vacancies fell 4.3%M/M but was up 15.2%Y/Y – a growth rate that is flattered by last year’s weak base (the number of new jobs offers was more than 14% lower than in February 2020).

Tokyo CPI points to lift in core prices in May, but still lower than a year earlier
Today also brought the release of the advance CPI report for the Tokyo area for May. After falling sharply last month due to a near 28%M/M decline in mobile phone call charges, the headline CPI index increased 0.3%M/M in seasonally adjusted terms, which also caused annual inflation to increase 0.2ppts to -0.4%Y/Y – 0.1ppts firmer than the consensus expectation. After declining over the previous three months, prices for fresh food rebounded 2.0%M/M but were still down 5.1%Y/Y. Even so, the BoJ’s forecast measure of core inflation – which excludes fresh food – also declined 0.3%M/M in May, leaving annual inflation steady at -0.2%Y/Y – a result that was in line with market expectations. Meanwhile, energy prices increased a further 3.1%M/M, reducing the annual decline in prices by 3.4pts to 1.3%Y/Y. Therefore, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – increased by a slightly smaller 0.2%M/M in May, causing annual inflation to decline an as-expected 0.1ppts to -0.1%Y/Y. The narrower measure of core prices used overseas – which excludes all food and energy – also increased 0.2%M/M, lowering annual inflation by 0.1pts to -0.1%Y/Y.

Within the core, mobile phone call charges fell a further 1.2%M/M in May. But with call charges declining, retailers hiked the price of phones by 5.4%M/M. Education-related prices increased 0.3%M/M, with PTA membership fees rising 8.2%M/M as pandemic-related price decreases were reversed. Prices also increased for medical care and medicines and for recreational goods. Total goods prices increased 0.6%M/M in May but remained down 0.4%Y/Y. Industrial goods prices increased 0.1%M/M and 0.7%Y/Y. In the services sector prices were steady in May, leaving the annual decline in services unchanged at 0.3%Y/Y.

France to publish first flash euro area inflation figures for May, Commission survey and spending data also due
This morning will bring plenty of data from the euro area including the first flash estimate of inflation in May, from France. Last month, the EU-harmonised measure of French inflation rose 0.2ppt to 1.6%Y/Y, the highest since January 2020. Energy inflation was inevitably the main source of upwards pressure, with core inflation on the same basis still subdued at 1.1%Y/Y. A further increase of 0.2ppt in May to 1.8%Y/Y, the highest since December 2018, is expected.

Also due from the euro area today are the European Commission economic sentiment indices for May, which are bound to be strong in line with the findings of the national surveys from the large member states. Indeed, the Commission’s industrial confidence measure is likely to rise to a series high, while the services sector indicator is expected to increase to the highest level since February 2020 closer to the long-run average. Firms’ price expectations seem bound to remain elevated given ongoing supply bottlenecks. Other data to be published this morning include French consumer spending numbers for April, which will report a drop in response to the tightening of pandemic restrictions, as well as Spanish retail sales data for the same month, as well as final French Q1 GDP numbers (the preliminary estimate revealed growth of 0.4%Q/Q and 1.5%Y/Y).

US core PCE deflator to rise steeply today; April activity indicators also of interest
Today most interest will centre on the personal income and spending report for April. The former jumped more than 21%M/M in March due to the receipt of stimulus payments, and so Daiwa America’s Mike Moran expects a 13.0%M/M downward correction this month. Encouragingly, given the resilience seen in the retail data, Mike expects a modest 0.2%M/M lift in spending in April despite the strong 4.2%M/M uplift seen in March. Perhaps of greater market interest today, following the shock CPI reading, Mike estimates that the core PCE deflator will post a 0.5%M/M increase – the most since 2001 – which given reinforcing base effects should lift annual inflation to around a three-decade high of 2.8%Y/Y.

Today will also bring the Chicago PMI and final University of Michigan consumer confidence readings for May and the advance readings on inventories and merchandise trade for April. Regarding the trade report, Mike expects both exports and imports to ease, but the decline in imports should dominate to deliver a modestly narrower trade deficit for the month.

Kiwi consumer confidence nudges lower in May; filled jobs rise to record high in April
After setting a fresh post-pandemic high last month, the ANZ consumer confidence index declined a modest 1.2%M/M to 114.0 in May, thus remaining slightly below the long-term average. While respondents were slightly more optimistic about the economy’s long-term outlook, they were slightly less upbeat about the near term outlook and about the outlook for their own family finances. Attitudes to buying major household items improved marginally to a three-month high.

In other news, Statistics New Zealand’s experimental tax-based measure of filled jobs grew 0.3%M/M in April, thus surpassing the previous record high set in March last year.

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