Tokyo headline CPI inflation slightly weaker than expected

Chris Scicluna

Markets leaning negative in Asia as worries about delta and Chinese regulators continue to percolate; upbeat RBA surprises commentators by leaving QE taper plans unchanged
Despite opening with a positive tone – and maintaining gains following slightly softer than expected ISM manufacturing and construction spending reports – Wall Street gave up ground on Monday afternoon, leaving the S&P500 with a modest 0.2% loss. The softening came as US Treasuries rallied, with the 10Y yield falling below 1.15% at one point before closing the session at 1.17% – down 5bps on the day. A few hours earlier, crude oil had slumped more than 3%, with the increasing incidence of the delta variant of coronavirus reducing mobility across Asia in particular.

Against that background, while US equity futures are presently a couple of tenths firmer, it has mostly been a softer day across the Asia-Pacific equity markets. In Japan, the TOPIX is presently down around 0.4%, with Finance Minister Aso acknowledging that the government’s fiscal position was deteriorating due to public spending associated with the pandemic and suggesting that a further supplementary budget was not under discussion at this stage (while the timing of the next fiscal package is uncertain, a post-election supplementary budget in November might be most likely). Markets are down similarly in Hong Kong, with gaming and social media giant Tencent slumping amidst ongoing worries about the recent actions of China’s regulators – this after a state-owned paper expressed concern about harm caused by online games. But while Singapore is also well in the red, stocks are currently only slighter softer in Mainland China and a little firmer in South Korea.

In the Antipodes, the focus has been on the RBA’s latest Board meeting. Of greatest note, whereas most commentators had expected the Board to defer last month’s decision to taper its asset purchases, the Board elected to keep all dimensions of its policy unchanged, with the Bank’s baseline outlook for the unemployment rate upgraded despite the prospect of some near-term weakness. Propelled by a decline in resource stocks, the ASX200 is currently slightly in the red, as it had been prior to the RBA’s meeting. Meanwhile, after trading down to 1.13% ahead of the RBA’s decision, the 10Y AGCB has rebounded to 1.15% but remains 2.5bps below Friday’s close (cash markets were closed for the New South Wales Bank holiday yesterday). The Aussie dollar has also rallied modestly following the RBA’s decision. In New Zealand, stocks were little changed even as the RBNZ announced that it would soon begin consulting on ways to tighten mortgage lending standards amidst a continuing surge in house prices.

Tokyo headline CPI inflation slightly weaker than expected in July as food prices drag; core prices lift in the month but BoJ’s preferred measure still rooted at 0.0%Y/Y
The main economic report of note in Japan today was the advance CPI report for the Tokyo area for July. The headline CPI index increased just 0.1%M/M in seasonally adjusted terms, which caused annual inflation to decline 0.1ppt to -0.1%Y/Y – 0.2ppt softer than the consensus expectation. The headline index was weighed down by what appears to have been an unexpected 1.2%M/M decline in the price of fresh food – this following a near 5%M/M increase in June – which was also down 2.8%Y/Y. As a result, the BoJ’s forecast measure of core inflation – which excludes fresh food – increased a much firmer 0.3%M/M. This was sufficient to lift annual inflation on this measure by 0.1ppt to 0.1%Y/Y – 0.1ppt firmer than market expectations and the first positive reading since July last year. However, sadly, that increase owed partly to a further 0.9%M/M lift in energy prices – the sixth consecutive increase – which as a result are now up 1.1%Y/Y, and so contributing positively to annual inflation for the first time since August 2019. As a result, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – increased 0.2%M/M in June, causing annual inflation to remain stable at 0.0%Y/Y, in line with the consensus expectation. The narrower measure of core prices used overseas – which excludes all food and energy – likewise increased 0.2%M/M, lowering annual inflation by 0.1ppt to 0.0%Y/Y.

Within the core, prices for household durable goods increased a further 2.6%M/M and so are now up 7.6%Y/Y – probably reflecting the impact of higher commodity prices and the weaker yen. Higher prices were also observed for books and both private and public transportation. Overall goods prices increased just 0.1%M/M and 0.3%Y/Y (0.2%M/M and 0.6%Y/Y excluding the impact of lower prices for fresh food). In the services sector prices increased 0.2%M/M – the first increase since April – but were still down 0.3%Y/Y, weighed down by the steep decline in mobile phone calling fees back in April.

The only other economic data in Japan today were the BoJ’s monetary base figures for July. In seasonally-adjusted terms, the monetary base contracted for a second consecutive month – a sharp contrast with the situation a year earlier, when the monetary base was expanding rapidly thanks to the BoJ’s asset purchases. As a result, annual growth in the monetary base slowed for a third consecutive month, reaching 15.4%Y/Y in July from 19.1%Y/Y in June, with a further slowing likely over coming months.

Euro area PPI due on a quiet day for economic data
A relatively quiet day in the euro area today brings the release of producer price data for June. The annual growth rate is expected to rise to a record high of 10.3%Y/Y in June, from 9.6%Y/Y in May, in part pushed higher by prices of energy and intermediate goods, the latter exacerbated by supply-side pressures, evident again in yesterday’s euro area manufacturing PMIs which reported near-record readings on the input cost and output price indices.

Auto sales and factory orders ahead in the US today; Fed’s Clarida speaks and plenty of corporate reporting too
Today’s US economic diary features the release of auto sales data for July and the full factory orders report for June. Daiwa America’s Mike Moran expects a small pickup in auto sales to around a 15.6mn annualised pace, while a lift in non-durable goods orders should complement the lift in durable goods orders that was indicated in the flash report and so deliver a 0.9%M/M increase in overall factory orders. Fed Vice-Chair Clarida will speak today on “Outlooks, Outcomes and Prospects for US Monetary Policy”. Meanwhile, it is another busy day for corporate earnings, with around 50 S&P500 companies scheduled to share their quarterly results.

Upbeat RBA maintains the status quo, at least for now, with QE taper still to commence in early September; underlying inflation expected to lift to 2¼%Y/Y by the end of 2023
The focus in Australia today’s has been on the outcome of the RBA’s latest Board meeting, with the market widely anticipating some response by the Bank to the near-term economic impact of recent virus outbreaks, especially the prolonged outbreak in Sydney. However, the RBA has left all dimensions of its monetary policy unchanged. This includes the 0.1% cash rate, the 0.1% target for the April ’24 bond and the parameters of the Term Funding Facility. And surprisingly to most commentators, the Bank also retained last month’s decision to begin tapering its asset purchases to $A4bn per week from early September. As we noted yesterday, the need for a monetary policy response was unclear to us, at least at this stage, especially with Aussie bond yields and the Aussie dollar already declining in reaction to the virus outbreak, and fiscal support also being provided by both the federal and state governments. It appears that the RBA’s Board agrees, at least for now. But the post-meeting statement does note that the programme will continue to be reviewed in light of economic conditions and the health situation, and how this impacts the outlook for employment and inflation.

While the Bank acknowledged the near-term challenges created by the Sydney lockdown – including the likelihood that economic activity will contract in Q3 – the RBA remains fundamentally optimistic about the economic outlook. In the post-meeting statement, the Bank noted that the economy had considerable momentum prior to the current virus outbreaks. And in the Bank’s view, the economy is still expected to grow strongly next year. The Bank’s new baseline economic outlook – which the Bank will elaborate on in Friday’s quarterly Statement on Monetary Policy – is for GDP growth of around 4% over 2022 and by around 2½% in 2023. This scenario assumes ongoing progress in the vaccination programme that permits a gradual reopening of the international border from the middle of next year. Crucially, while the Bank anticipates that the unemployment rate will rise in the near-term, most of the impact of the lockdown on the labour is expected to come through in hours worked and participation (especially in an environment of increasing skill shortages in parts of the economy). So with recent outcomes having been much stronger than the Bank had expected, the unemployment rate is now expected to end next year at 4¼% – a ¼ppt lower than forecast previously – and decline further to 4% by the end of 2023.

However, this forecast upgrade has once again had no obvious payoff in terms of raising the outlook for inflation. Annual underlying inflation is forecast to be 1¾% at the end of next year – unchanged from the Bank’s previous forecast. The Bank’s first forecast for the full 2023 calendar year sees underlying inflation end that year at 2¼%. While the latter is inside the Bank’s 2-3%, we note that Governor Lowe has said previously that inflation would need to be comfortably within the target range – and expected to remain there – for at least a couple of quarters before a rise in the cash rate would be considered. So unsurprisingly, the Bank’s forward guidance regarding the outlook for interest rates was unchanged. Specifically, it remains the case that the Board thinks that the conditions required to prompt a rate hike are unlikely to be met “before 2024”. The Bank will have the opportunity to elaborate on the outlook on Friday when it releases the quarterly Statement of Monetary Policy, while on that day Governor Lowe will also give his semi-annual testimony to the House Standing Committee on Economics.

Aussie dwelling approvals and housing finance approvals slow in June; consumer confidence nudged up over the past week
Turning to the day’s Aussie data, the number of dwelling consents fell 6.7%M/M in June – the third consecutive decline following a steep increase during Q1. Even so, approvals were still up a whopping 48.9%Y/Y, in part because June 2020 represented the pandemic low-point. Approvals for private houses – which had hit a record high in April – declined a further 11.8%M/M but were still up 44.3%Y/Y. Approvals for multi-unit dwellings increased 0.8%M/M and 63.7%Y/Y. In value terms, approvals for non-residential buildings fell 3.0%M/M but still increased 19.4%Y/Y. As a result, the value of approvals for all classes of buildings fell 2.6%M/M and yet remained up 36.2%Y/Y.

In a similar vein, the ABS reported that the value of new housing loan approvals declined 1.6%M/M in June from the record high reported in May. Even so, annual growth remained extremely strong at 82.7%Y/Y – a rate that is only slightly flattered by base effects associated with the onset of the pandemic. Approvals for investor loans increased a further 0.7%M/M and 102.0%Y/Y, but are yet to exceed the record high level set in early 2015. Meanwhile, the value of approvals for owner-occupier loans declined 2.5%M/M but were still up 75.9%Y/Y, and remain more than 65% above the pre-pandemic level. Approvals for personal fixed term loans also softened in June, declining 12.6%M/M – likely impacted by lockdowns in Victoria and New South Wales.

Finally, despite the ongoing lockdown in Sydney, the ANZ-Roy Morgan consumer confidence index increased 1.1% last week to 101.8 – still around 10pts below where the index had stood prior to the Sydney lockdown. While respondents were less positive about the near-term economic outlook, they were more positive about financial conditions and about buying conditions for major household items.

Kiwi house price inflation increases to 24.8%Y/Y in July; RBNZ to tighten macro-prudential policy further
According to Corelogic, Kiwi house prices increased a further 1.8%M/M in June, lifting annual house price inflation to a 24.8%Y/Y from 22.8%Y/Y previously, with strong price increases continuing to be seen across the country but especially in the capital city of Wellington – a reflection of the Government’s fiscal policy.

Not surprisingly, continued growth in house prices has prompted further action from the RBNZ. Today the Bank announced that it proposes to halve the amount of high-LVR lending that banks can do to just 10% of all new loans, effective from 1 October. In October, it also plans to consult on implementing debt-to-income ratios and/or interest rate floors

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