Japan’s CPI firmer than expected; UK retail sales fall

Emily Nicol

Wall Street steady but China leads weakness across most key Asian markets today
Wall Street oscillated around breakeven for much of Thursday’s session, but the S&P500 eventually closed with a modest 0.1% gain to break a two-day losing streak. While initial jobless claims were a little lower than expected last week, and the Philly Fed’s manufacturing survey was little changed in July, Treasury yields drifted lower with the 10Y note closing down 2bps at 1.24%. Even so, the greenback made gains against most counterparts with the exception of the yen, hinting at a degree of ongoing risk aversion.

Since the close, US equity futures have traded a couple of tenths lower amidst a weak session for equities across much of Asia. The heaviest losses have been concentrated in China, with the CSI300 and Hang Seng both down almost 2% as we write. While virus worries probably haven’t helped, at least some the weakness appears linked to worries about the heavily indebted China Evergrande Group and the increasingly wide net being cast by China’s regulators. In Japan, the TOPIX has declined 0.9%, taking its loss for the week to over 3½%. Toyota was down a further 2% today, which follow yesterday’s late 4% plunge after the company foreshadowed a 40% global production cut in September – this due to rising virus cases in South East Asia, which is also exacerbating chip shortages. Stocks have also declined a little more than 1% in South Korea today, but have firmed in Singapore.

Turning to the Antipodes, Australia’s ASX200 is little changed and AGCB bond yields just fractionally lower. This comes even after the New South Wales Premier advised that the soft lockdown in Greater Sydney would continue until at least the end of September, which follows the discovery of a further 642 cases over the past day (a further 55 cases were detected in the state of Victoria). Meanwhile, in New Zealand the current very strict lockdown was today extended nationwide until at least Tuesday, with the total number of virus cases now exceeding 30 including the first cases outside of Auckland (albeit linked to the Auckland outbreak). And so with every likelihood that the lockdown will be extended further when next reviewed on Monday, at least in the North Island, Kiwi bonds outperformed with the 10Y yield falling 6bps to 1.68%.

Japan’s national CPI report slightly firmer than expected in July; underlying inflation appears fractionally positive
The only economic report in Japan today was the national CPI for July. This report pointed to a larger monthly increase in prices than analysts had expected following the release of advance data for the Tokyo area, with both headline inflation and the various core measures printing firmer than surveyed market expectations.

The headline CPI index increased 0.2%M/M in seasonally adjusted terms following 0.3%M/M increases in the previous two months. Following the previously reported 0.7ppt downward revision to annual inflation in June – following the adoption of the 2020 base year, which amplified the impact of the huge drop in mobile phone calling fees back in April – this month’s increase caused annual inflation to increase 0.2ppt to -0.3%Y/Y, which was 0.1ppt firmer than market expectations. After increasing over the previous two months, prices for fresh food fell 2.4%M/M in July so were down 4.2%Y/Y. As a result, the BoJ’s forecast measure of core inflation – which excludes fresh food – increased by larger 0.4%M/M. This was sufficient to lift annual inflation by 0.3ppt to -0.2%Y/Y, which was 0.2ppt above the consensus estimate. That relatively large monthly movement owed partly to a further 1.5%M/M increase in energy prices, which are now up 5.8%Y/Y. And so the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – increased 0.3%M/M in July. This lifted annual inflation on this preferred measure by 0.3ppt to -0.6%Y/Y, which was also 0.2ppt above the consensus estimate. The narrower measure of core inflation used overseas – which excludes all food and energy – also firmed 0.3ppt to -0.8%Y/Y.

Elsewhere in the detail, while total goods prices increased just 0.1%M/M and 0.8%Y/Y, prices increased 0.3%M/M and 1.2%Y/Y excluding the impact of lower prices for fresh food. Industrial goods prices also increased 0.3%M/M and were up 1.4%Y/Y, which mostly reflects the impact of higher energy prices. However, prices for household durable goods increased 2.5%M/M in July, lifting annual inflation for these items to an 18-month high of 4.4%Y/Y. In the services sector, prices increased 0.3%M/M in July, led by higher prices for public transportation. However, with prices now estimated to have declined 2.0%M/M in April due to increased impact of lower mobile calling fees under the 2020 base weights, the annual decline in services prices still stood at 1.5%Y/Y, albeit smaller than the 1.7%Y/Y decline reported in June.

Under the 2020 base weights, the decline in mobile calling fees subtracted almost 1.2ppts from annual headline CPI inflation in July (more at the core level). The rebound in prices for energy has added 0.4ppt to inflation, so net of those effects annual inflation is probably best described as running at fractionally positive levels in underlying terms. The BoJ will release its formal underlying inflation measures for July on Tuesday, with measures such as the trimmed mean much less impacted by extreme price movements.

PBoC says prime lending rates unchanged for 16th consecutive month
As suggested by the steady 1Y MLF auction rate last week – today the PBoC left these rates unchanged for a 16th consecutive month. So the 1Y loan prime rate (the benchmark for corporate loans) was left at 3.85%, while the 5Y loan prime rate (the benchmark for mortgages) was left at 4.65%.

UK retail sales decline at a steeper-than-expected pace as consumer confidence eases
With spending on services having likely been given a boost by the final easing of restrictions in mid-July, a spike in the number of reported coronavirus cases and the so-called ‘pingdemic’ likely restraining retail footfall, today’s retail sales figures for that month reported a larger than expected decline at the start of Q3. In particular, sales fell 2.5%M/M in July, with growth in June revised down a touch to just 0.2%M/M too. As such, year-on-year growth moderated to just 2.4%Y/Y from 9.2%Y/Y previously. And while sales were still 5.8% above the pre-pandemic level. the July reading was almost 3% lower than the average level in Q2.

Within the detail, the weakness in July was widespread. The largest drop was seen in non-food store sales, down 4.4%M/M, with other non-food store sales falling a steep 10.1%M/M, the first monthly fall since February driven by declines in second-hand good and computer and telecoms equipment stores, with the later perhaps impacted by ongoing supply shortages. Clothing and household goods stores also saw sales decline 2%M/M and 3%M/M respectively. Spending at food store sales were also weaker (-1.5%M/M) following a strong showing in June that was reportedly boosted by the start of the European football championship. And auto fuel sales were dampened by the heavy rainfall at the start of the month that impacted road traffic volume.

While the spike in the new of new daily reported coronavirus cases appears to have stabilised somewhat during August, it remains to be seen to what extent households will continue to substitute consumption of goods for spending on services over the near term. The latest GfK consumer confidence survey also suggested that consumers remained somewhat cautious about the near-term outlook.

In particular, having risen in July to its highest level since the outbreak of the pandemic in February 2020, the headline index fell 1pt to -8. Of course, this was still considerably higher than its level a year earlier (-27). This in part reflected a further modest deterioration in consumers’ expectations of the economic situation over the coming twelve months to its lowest for four months, although the relevant index remained considerably higher than the pre-Covid level. So having in July hinted at a more positive climate for making major purchases today’s survey saw the relevant index reverse much of that improvement. And this tallied with a pickup in the survey’s savings intentions balance, which rose to its highest for two years. So, as and when concerns about the pandemic and economic outlook reside, this might suggest a potential source for a rebound in consumer spending in due course.

UK public borrowing continues to run below OBR forecast in July
Today’s UK public sector finance figures were broadly in line with expectations, reporting net borrowing of £10.4bn in July (excluding banking groups), inevitably the second-highest July reading since monthly records began in 1993, but lower than borrowing in June (which at £21.5bn was downwardly revised by ££0.7bn from the initial estimate) and also £10.1bn lower than July last year. Moreover, net borrowing was roughly £5bn less than had been forecast by the OBR.

The ongoing economic recovery helped to boost central government receipts which were estimated to have risen by £9.5bn compared with July 2020 to £70bn, with tax revenue up by £7.7bn to £51.7bn, supported not least by higher VAT contributions, PAYE and self-assessed income tax payments, although they were still down compared with July 2019. Meanwhile, central government expenditure stood at £79.8bn in July, down almost £3bn from July 2020 as spending on the government’s Jobs Retention Scheme (down £4.2bn) was considerably lower than a year ago.

Overall, in the first four months of the financial year, central government expenditure was estimated to have fallen by £28.6bn compared with the same period in 2020. And with receipts up by £34.8bn, public sector net borrowing in the financial year to date stood at £78.0bn, a whopping £61.6bn (45%) lower than during the same period in 2020 and £26bn less than forecast by the OBR in March.

A quiet end to the week ahead in the US
Today there are no major economic reports due in the US. The Fed speaking diary is also light, with a speech by the Dallas Fed’s Kaplan the only one of note. 

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