Tokyo CPI inflation remains close to zero

Chris Scicluna

Asian markets mixed today as investors await today’s Powell speech to the Jackson Hole symposium
With today’s speech by Jay Powell to the Jackson Hole symposium looming large, and following news of both US military and civilian casualties following a bomb blast near Kabul airport, the S&P500 fell 0.5% yesterday. Risk aversion was also evident in the greenback, which made gains against most counterparts. However, with Q2 GDP growth revised up one notch to 6.7%AR, the yield on the 10Y note still closed up 1bp at 1.35%.

US equity futures have firmed a couple of tenths since the close amidst further media reports indicating that Jay Powell will be reappointed to lead the Fed when his current term expires in February. Meanwhile, it has been a mixed session in the Asia. After leading the region lower yesterday, stocks have rebounded somewhat in China, with the CSI300 presently up 0.4% despite corporate profit data pointing to a slowdown in growth in July (albeit not especially surprising in light of the activity data reported earlier this month). Some support may have been offered by yesterday’s PBoC statement that hinted that the bank might engage in targeted RRR cuts to boost rural sector development. By contrast, with new coronavirus cases in Japan continuing to trend at around 25,000 – a rate that PM Suga will sure hope to reverse ahead of next month’s LDP presidential election – the TOPIX has declined 0.3% today. There was little market reaction to a Tokyo core CPI reading that was fractionally firmer than consensus estimates.

In the Antipodes, Australia’s ASX200 was steady today with news of a 2.7%M/M slump in retail spending in July largely as anticipated given the extended lockdown in New South Wales. While that state reported a further 882 new virus cases today, this was at least down from yesterday’s record high, and so AGCB yields nudged slightly higher after outperforming USTs yesterday. In New Zealand, the 10Y NZGB lifted 5bps after PM Ardern indicated that regions south of Auckland – comprising about 60% of the population – would move to a slightly less strict lockdown from midnight Tuesday. However, with 70 new cases uncovered in Auckland over the past day, she indicated that the north of the country would most likely remain in strict lockdown until at least mid-September, with only essential services workers permitted to go to work.

Tokyo CPI inflation remains close to zero in August
A quiet week for economic data in Japan ended today with the release of the advance CPI report for the Tokyo area for August. After increasing over the previous three months, the headline CPI index declined 0.3%M/M in seasonally adjusted terms (the index was steady in unadjusted terms). This caused annual inflation to remain at -0.4%Y/Y, rather than nudge higher as had been the consensus expectation. The headline CPI was weighed down by a second consecutive 1.5%M/M decline in the price of fresh food. Even so, the BoJ’s forecast measure of core inflation – which excludes fresh food – also declined by a seasonally adjusted 0.3%M/M. However, with fresh food prices down 9.9%Y/Y from their recent high peak seen last August, annual inflation on this measure still increased by 0.3ppts to 0.0%Y/Y, which was 0.1ppt firmer than the consensus expectation. Energy prices fell 0.4%M/M, marking the first decline since January, but given base effects the annual increase in energy prices nudged up 0.2ppts to 0.9%Y/Y. This had little impact on the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – which also declined by a seasonally adjusted 0.3%M/M in August. As a result, annual inflation on this measure also increased 0.3ppts to -0.1%Y/Y, which was also 0.1ppt firmer than the consensus expectation. The narrower measure of core prices used overseas – which excludes all food and energy – likewise declined 0.1%Y/Y.

Prices for goods declined by a seasonally-adjusted 0.2%M/M in August – the largest decline this year – and so were down 0.4%Y/Y. This reflects the combination of lower prices for both food and energy. Excluding fresh foods, goods prices increased 0.6%Y/Y, while prices for industrial goods increased 0.8%Y/Y. Within the core, prices for household durable goods increased a further 1.2%M/M and so are now up 10.5%Y/Y – probably reflecting the impact of higher commodity prices and the weaker yen. Higher prices were also observed for furniture and household utensils. In the services sector, prices declined a seasonally-adjusted 0.6%M/M in August. However, given that they had fallen by even more last August – reflecting the slump in hotel charges associated with the government’s ill-fated Go-To-Travel promotion – annual inflation in the services sector still increased 0.3ppts to -0.5%Y/Y. Of course, annual inflation continues to be weighed down by the steep decline in mobile phone calling fees back in April (even more so with the recent move to a new 2020 base year). Prices related to domestic duties increased 2.3%Y/Y, while prices related to health and welfare services fell 0.3%Y/Y. As the BoJ’s underlying inflation measures suggested earlier this week, the inflation trend in Japan is probably best described as fractionally above zero.

China’s industrial profit growth eases further in July in line with activity indicators
A similarly quiet day for data in China saw only the release of figures on industrial profits for July. Base effects associated with China’s early-2020 lockdown had driven most of the softening trend observed during the first half of the year. However, today’s news that growth had moderated further to 16.4%Y/Y in July from 20.0%Y/Y in June appears to reflect the softening seen in China’s key activity indicators reported earlier this month, with growth in IP slowing to 6.4%Y/Y from 8.3%Y/Y previously. That slowdown was due to the impact of local virus outbreaks, as well as floods, so probably understated the underlying trend. Cumulative profits for the year to date – which continue to be impacted significantly by base effects – increased 57.3%YTD/Y in July on sales that grew 25.6%YTD/Y. Within the manufacturing sector, the strongest growth remained in the ferrous and non-ferrous metal smelting industries and the chemicals sector, where profits grew as much as three-fold. Profits for food and textile producers grew on slightly above 4%YTD/Y, while growth in profits for motor vehicle producers slowed sharply to 19.7%Y/Y.

French consumer confidence softens, Italian sentiment surveys due shortly
This morning’s French INSEE consumer sentiment survey results for August were a touch disappointing. Despite signs that the flow of new coronavirus cases is starting to slow, the headline consumer confidence index slipped back slightly, declining 1pt on the month to 99, just below the long-run average and 3pts down from June’s post-Covid high. Within the detail, consumers were more downbeat about their personal financial situation and the outlook for their standard of living. However, concerns about unemployment were stable below than the long-term average. The share of households judging it to be a good time to make major purchases was also stable and above the long-run average. And the share of households expecting prices to rise over the coming twelve months rose further above the long-run average.

The Italian ISTAT economic surveys due later this morning are similarly expected to signal a slight softening of sentiment, albeit from a lofty level. So, having risen to a near-three-year high in July, the headline consumer confidence index is expected to have slipped back, nevertheless remaining an at elevated level far above the post-pandemic average. Business sentiment among manufacturers and service providers alike is also likely to have eased on the back of the recent pickup in the delta variant.

All eyes on Jay Powell’s speech to Jackson Hole symposium today; key economic data also due, casting light on activity, inflation and sentiment
Without a doubt, the key focus today for investors in the US – and elsewhere – will be Fed Chair Powell’s much-awaited speech on the economic outlook to the Kansas City Fed’s Jackson Hole symposium (scheduled for 10am EST). Given rising uncertainty created by the increasing number of delta-variant virus cases, we think that the likelihood of Powell using this opportunity to announce definitive new guidance regarding the Fed’s policy intentions, especially as regards the QE taper, is now relatively low. Indeed, indicative of the changing environment, last week a rise in local virus cases forced organizers to move the event online, with Powell already announcing a day earlier that he would deliver his comments by webcast. So, while Powell’s speech will likely continue to characterise the economic outlook in favourable terms amidst global progress in vaccination, risks to the downside will probably receive more emphasis than they did when Powell last spoke on the economy.

Ahead of Powell’s speech, following yesterday’s very minor revision to Q2 GDP growth, today’s data flow will bring further clues on activity in the current quarter. Most interest will centre on developments in personal income and spending in July, with further growth anticipated in light of continued growth in employment. In addition, this report should also reveal a smaller increase in the core PCE deflator than seen in prior months, although the consensus estimate of 0.3%M/M would likely still nudge annual inflation up 0.1ppts to 3.6%Y/Y (it was close to rounding up last month). Today will also bring advance readings on merchandise trade and retail and wholesale inventories for July. Finally, at around the time that Powell begins his speech, the final results of the University of Michigan’s survey for August will be released, with the preliminary findings pointing to a substantial drop in consumer sentiment to a new pandemic low.

Australian retail sales decline 2.7%M/M in July as lockdowns continue to weigh
After declining 1.8%M/M in June, reflecting the stay-at-home orders in place for at least part of the month in New South Wales, Victoria and Queensland, retail sales fell a further 2.7%M/M in July, reflecting the worsening virus outbreak (especially in New South Wales). As a result, spending was also down 3.1%Y/Y, compared with the 2.9%Y/Y lift in June, and 3.7% lower than the average level through Q2. Unsurprisingly, the detail provided today – more will be available next week – points to double-digit monthly declines in spending at cafes and restaurants, department stores and clothing stores (the latter down more than 15%M/M). Spending at supermarkets jumped 2.3%M/M, but spending at household goods retailers fell 2.2%M/M. With New South Wales subject to restrictions for the entire month, sales there plunged 8.9%M/M while spending also fell 3.3%M/M in South Australia and 0.9%M/M in Queensland. By contrast, after declining sharply the prior month, spending in Victoria increased 1.3%M/M, with solid growth also recorded in Australia’s other states and territories.

Kiwi consumer confidence eases in August, surveyed mostly pre-lockdown; growth in jobs remained very strong in July
The ANZ-Roy Morgan consumer confidence index fell 3.1%M/M to 109.6 in August, marking the lowest reading since November last year. Respondents were both less upbeat about the economic outlook and about buying conditions for major household purchasers. While some of the decline probably reflects the recent virus outbreak and strict lockdown, the compilers of the survey estimate that at least 85% of the responses were received ahead of that event. Therefore, at least some of the decline in sentiment likely reflects reaction to virus developments in Australia and elsewhere, as well as to developments in inflation (consumers’ year-ahead inflation expectation increased to 5.1%Y/Y).

In other news, Statistics New Zealand reported that the number of filled jobs – as measured by tax data – increased a very strong 0.8%M/M in July, again illustrating how well the economy was doing prior to the current virus outbreak.

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