Japan’s Tokyo CPI points to modest lift in core prices in June

Chris Scicluna

Treasury yields a little higher overnight; markets generally very quiet in Asia today
With the Fed’s latest stress tests expected to clear the way for banks to step up dividend payments and buybacks – an expectation met after the close with the Fed lifting constraints on all banks – a rally in financial stocks helped to drive the S&P500 to an advance of 0.6% and thus a new record high. News of a $579bn infrastructure deal, agreed between a bipartisan group of senators and the White House, that will provide further support to the economy assuming it passes Congress, also helped lift investor sentiment. While the rebound in durable goods orders in May was slightly smaller than expected, any disappointment was offset by upward revisions to April. Despite the positive sentiment in equity markets, it was a quiet session for US Treasuries, with little reaction to the latest batch of Fed commentary. The greenback was little changed, weakening fractionally against the Antipodean currencies but gaining against sterling as the BoE’s MPC stated that current price pressures are likely to be transitory and departing Chief Economist Haldane remained the lone hawk calling for an early end to QE.

US equity futures and Treasuries have been little changed during the Asia-Pacific session. So, unsurprisingly perhaps, it has been a positive day for equity investors in the region, with the major bourses generally at least keeping pace with yesterday’s gains on Wall Street. In money markets, with year-end pressures eyed, the PBoC injected a net CNY20bn via 7-day reverse repo for a second consecutive day, driving the overnight repo rate to a 6-week low. So, while bond yields were steady, China’s equity markets have led the gains with the CSI300 and Hang Seng both rallying more than 1%. In Japan, the TOPIX advanced 0.8% while there has been little response in the JGB market to an advance Tokyo CPI report that was slightly firmer than expected (indeed, mid-term bonds were slightly firmer on the day). In Australia, the ASX200 slightly underperformed with a 0.5% gain after that the NSW Premier announced that four areas of Sydney will be subject to a lockdown until at least 2 July. This decision follows news of a further 17 infections in the city, lifting the coronavirus outbreak to 65 cases.

Japan’s Tokyo CPI points to modest lift in core prices in June, slightly firmer than expected
Today brought the release of the advance CPI report for the Tokyo area for June, which provided an upside surprise for markets – albeit mainly due to a sharp rebound in the price of fresh food. The headline CPI index increased 0.3%M/M in seasonally adjusted terms, which also caused annual inflation to increase 0.4ppt to 0.0%Y/Y – 0.3ppt firmer than the consensus expectation. Prices for fresh food – which late last year had declined to a three-year low – rebounded 5.0%M/M in June to be up 0.7%Y/Y. As a result, the BoJ’s forecast measure of core inflation – which excludes fresh food – increased a much more modest 0.1%M/M. However, this was still sufficient to lift annual inflation by 0.2ppt to 0.0%Y/Y – 0.1ppt firmer than market expectations and the first non-negative reading since July last year. Meanwhile, energy prices increased a further 1.2%M/M – the smallest increase since February – reducing the annual decline in prices by 0.9ppt to just 0.4%Y/Y. Even so, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – also increased 0.1%M/M in June, causing annual inflation to increase by an unexpected 0.1ppt to 0.0%Y/Y. The narrower measure of core prices used overseas – which excludes all food and energy – likewise increased 0.1%M/M, lifting annual inflation by 0.2ppt to 0.1%Y/Y.

Within the core, in June higher prices were observed for household durable goods and furnishings, medical supplies and recreational goods. However, while total goods prices increased 0.5%M/M, prices were steady excluding the impact of higher prices for fresh food. Goods prices increased 0.2%Y/Y but just 0.1%Y/Y excluding prices for fresh food. Industrial goods prices edged down 0.1%M/M and increased just 0.6%Y/Y. In the services sector prices were steady for a second consecutive month in June, although the annual decline in services prices moderated by 0.1ppt to 0.2%Y/Y. So overall, consumer prices appear to being moving sideways in Japan – on one level disappointing for the BoJ, but perhaps a better base than might have been feared at the beginning of the pandemic. And with the labour market remaining tight despite the turndown in the economy, the BoJ will doubtless continue to forecast a gradual lift in inflation as the recovery matures.

In other news, the BoJ’s preliminary Flow of Funds accounts for Q1 pointed to larger financial surpluses in both the household and non-financial corporate sector, together with a larger financial deficit in the general government sector. Meanwhile, with the BoJ scaling back its asset purchases, its share of JGBs outstanding declined to 44.5%, while the share held by banks grew to 14.5% with holdings rising more than 19%Y/Y.

German consumer confidence firmer but still below pre-pandemic level; Italian sentiment survey and euro area bank lending data due today
Following yesterday’s strong ifo business survey and the flash PMIs earlier in the week, this morning’s German GfK consumer survey was also upbeat, with the headline index rising a greater-than-expected 6.6pts to -0.3. That, however, left it no higher than the level registered in the lull in the pandemic last August, and hence still some way down on the pre-pandemic levels. Within the detail, households were only a little more inclined to make purchases, but were significantly more optimistic about their expected future income (the highest since the pandemic) and the overall economic outlook (the best in a decade).

Looking ahead to the remainder of the day, the focus will remain on national economic sentiment data, with Italy's ISTAT due to publish its latest business and consumer survey results. The Italian manufacturing confidence indicator is expected to rise further after reaching its highest level in more than a decade in May. And we look for further significant improvement in confidence in the services sector and among Italian consumers too. Other euro area data due include bank lending and deposit figures for May.

UK consumer confidence steady in June; CBI distributive trades survey likely to point to elevated retail sales
Somewhat disappointingly, the Gfk measure of UK consumer confidence was steady at -9 in June, thus failing to recapture its pre-pandemic level. The detail of the survey registered only a modest improvement in the climate for making major purchases, which – jarring with recent strong spending on goods – similarly remained down on the pre-pandemic level. But while it was a touch softer on the month, consumers’ assessment of the economic outlook was still close to the highest since 2015. Consumers’ expectation for their own personal financial situation was also a touch softer, but was broadly in line with the pre-pandemic level. In a little while we will receive the CBI distributive trades survey for June, which will give an insight into the strength of retail sales this month – we expect this to remain consistent with an elevated level of sales, albeit perhaps at a slightly softer level than the prior couple of months reflecting evidence of a drop in shopping centre footfall and greater opportunities to spend on services.

May inflation data ahead in the US today, together with the final UoM consumer survey results for June
Today brings the release of the US personal income and consumer spending report for May. A key focus will be on developments in the Fed’s preferred core inflation metric – the core PCE deflator – especially in light of the much firmer than expected CPI data released earlier this month. Daiwa America Chief Economist Mike Moran expects an advance of 0.5%M/M, lifting annual inflation to a more than 29-year high of 3.3%Y/Y from 3.1%Y/Y in April. Elsewhere in the report, despite further improvement in the labour market, Mike expects a 3.5%M/M dip in personal income as transfer payments continue to normalize. However, the continued reopening of the economy should provide a boost to spending of services, leading to a 0.5%M/M increase in overall consumer spending despite the softness seen in retail sales data earlier this month. The University of Michigan’s finalized consumer survey for June will close out the week, while today’s busy line-up of Fed speakers features presidents Kashkari, Mester, Rosengren and Williams.

Kiwi trade surplus rises modestly in May
A quiet week for Kiwi data ended with news of a merchandise trade surplus of $NZ469m in May, just $55m greater than in April but over $800mn less than in May last year when lockdown conditions and a plunge in oil prices were weighing heavily on imports. In seasonally-adjusted terms, exports increased 2.8%M/M and so were up 8.9%Y/Y – not a bad result considering the depressing effect of a 9% appreciation of the trade-weighted exchange rate over the past year. Exports of milk powder, butter and cheese – which account for a quarter of all exports – increased 11.6%Y/Y, while significant contributions to growth were also made by exports of logs, aluminium, casein and mechanical machinery. After declining sharply last month, imports rebounded 6.2%M/M but due to weak base effects were up 31.3%Y/Y. Of particular note was a near 87%Y/Y increase in imports of crude oil and a more than 250% increase in imports of motor vehicles. Imports of consumption goods increased just over 14%Y/Y while imports of machinery and plant increased over 24%Y/Y.

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