A rebound in fresh food prices drives a sharp lift in the Tokyo CPI

Chris Scicluna
Emily Nicol

Asian equity markets mostly weaker today following losses on Wall Street
Friday’s rebound on Wall Street proved very short-lived, with the S&P500 declining 1.3% to deliver its lowest close since 19 July (and thus closing below its 100-day average). The sell-off was led by the big end of the technology sector – dragging the Nasdaq to a larger 2.1% decline – and was associated with a modest lift in bond yields, with the 10Y closing 2bps higher at 1.48%. Despite the worries expressed in the equity market, commodity prices moved higher – especially oil – and the dollar failed to gain any significant traction. In economic news, factory orders increased slightly more than expected in August, but there was no progress in resolving the debt ceiling impasse, with President Biden calling on Republican senators to relent on enforcing the filibuster even if they object to voting for a further suspension of the ceiling.

Since the close, US equity futures have moved fractionally higher – more so beaten up Nasdaq futures – while UST yields have nudged a little higher. After falling heavily yesterday, the Hang Seng is presently flat, but real estate stocks are weaker as questions continue to be asked about the underlying health of Chinese developers (and not just Chinese Evergrande). Against that background, and with markets remaining closed in Mainland China for the Golden Week holiday, it has been a weaker day for most other Asian stock markets. South Korea’s KOSPI has led the way, currently down about 2.0% after returning from Monday’s holiday. Markets are also decisively weaker in Japan, with the TOPIX closing 1.3% lower despite a modest upward revision to the services PMI for September, thus taking its loss for the month to date to more than 4%. In political news, freshly minted trade minister Koichi Hagiuda told reporters that the Kishida-led government would not be beholden to a continuation of Abenomics, which he described as a “launching pad” that needed to be followed by a “more cool-headed approach to policy”. Of course, Kishida campaigned on the platform of “new Japanese capitalism”, but details remain scarce about what this means in practice. Hagiuda also stated his intention to expand the renewable energy sector as far and quickly as is feasible while restarting nuclear power plants where safety permits, in order to meet Japan’s 2030 target date for a 46% cut in greenhouse gas emissions from 2013 levels.

Turning to the Antipodes, with the rise in the oil price driving energy stocks higher, Australia’s ASX200 has fared better than most with a 0.4% loss. The RBA provided no surprises, leaving all aspects of its policy unchanged and retaining its upbeat prognosis for the economy but not inflation. So, with Australia reporting a new record trade surplus in August, improving sentiment and still high levels of job advertising despite the current lockdowns, the 10Y AGCB yield has tracked the 10Y UST higher. Kiwi yields also nudged higher with a business survey continuing to report acute skill shortages and historically high levels of upward pressure on prices, also leaving the market more than 85% priced for the RBNZ to deliver a 25bp rate hike at tomorrow’s policy review.

A rebound in fresh food prices drives a surprisingly large lift in the Tokyo CPI in September, but core measures subdued as expected
Turning to today’s Japanese data, the advance CPI report for the Tokyo area reported a far sharper lift in headline inflation in September than the consensus had anticipated. Indeed, the headline CPI index increased 0.5%M/M in seasonally adjusted terms (0.3%M/M in unadjusted terms) causing annual inflation to lift 0.7pps to 0.3%Y/Y – the first positive reading in 12 months. Sadly for the BoJ, most of the monthly increase was explained by a 9.0%M/M rebound in the price of fresh food – with fresh vegetable prices surging almost 21%M/M – with prices for these items now up 5.0%Y/Y after being down 8.2%Y/Y in August. As a result, the BoJ’s forecast measure of core inflation – which excludes fresh food – increased just 0.1%M/M, so that annual inflation nudged up just 0.1%ppts to 0.1%Y/Y – a result that was actually 0.1ppts below the consensus estimate. After declining modestly in August, energy prices resumed their previous uptrend with a 1.7%M/M increase in September, which given base effects lifted the annual increase in energy prices by a sizeable 3.5ppts to 4.4%Y/Y. Even so, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – also increased by a seasonally adjusted 0.1%M/M in September. As a result, annual inflation on this measure was steady at -0.1%Y/Y, which was in line with the consensus expectation. However, the narrower measure of core prices used overseas – which excludes all food and energy – declined 0.1ppts to 0.2%Y/Y.

Given the surge in fresh food prices, prices for goods increased a whopping 1.3%M/M in September and so were up 1.5%Y/Y. Excluding fresh foods, goods prices increased 0.6%M/M and 1.2%Y/Y. Aside from price increases related to fuel, of note was a 2.0%M/M increase prices for interior furnishings – the second large increase inside the last three months – with prices now up 7.6%Y/Y. Prices for household durable goods, which had increased sharply over the previous two months, fell 2.6%M/M in September but were still up 7.1%Y/Y. Of course, if the BoJ is going to get anywhere close to achieving its current inflation target, then it will need to engineer inflation in the services sector too. However, services prices fell 0.4%M/M in September – albeit a move that appears attributable to seasonal effects – and so annual inflation in the services sector declined 0.1ppts to -0.6%Y/Y. Of course, annual inflation in the services sector continues to be weighed down by the steep decline in mobile phone calling fees back in April. Therefore, as the BoJ’s underlying inflation measures suggested for August, excluding one-offs and volatile factors, the inflation trend in Japan is still probably best described as running fractionally above zero.

Japan’s services PMI revised up 0.6pts to final reading of 47.8 in September
In other news, today also brought the release of Japan’s final service sector and composite PMI reports for September, which reinforced the improvement that was evident in the flash survey amidst a sharp decline in local virus cases. The headline PMI services index – the business activity index – was revised up 0.4pts to 47.8, which now stands 4.9pts above the August reading and just below that seen in June. The new orders index was revised up a similar 0.5pts to 48.1, leaving it up 3.4pts for the month and just 0.4pts weaker than in July. Even more encouragingly, the business expectations index was revised up a more significant 2.4pts to a three-month high of 58.0, while the employment index was revised up 0.2pts to a five-month high of 51.6, thus continuing to signal a degree of optimism about the medium-term outlook. Meanwhile, revisions to the pricing indexes were modest, with a 0.2pt upward revision to the output prices index extending its rebound to 50.3 – up 2.1pts for the month and now just below the July reading. In combination with the small upward revision to the manufacturing PMI output index reported at the end of last week, today’s slightly improved showing from the service sector meant that the composite PMI output index was revised up 0.2pts to a final reading of 47.9 – a 2.4pt improvement since August. And with state of emergency conditions being lifted at the end of last month, there would appear to be a good prospect of further improvement when the flash October reading is released later this month.

BoJ estimates that negative output gap widened in Q2; says potential growth just 0.1%Y/Y
Completing the day’s Japanese releases, the BoJ released its updated measures of potential growth and the output gap. According to the Bank’s estimate, despite the economy having grown modestly during the quarter, the negative output gap grew to 1.29% of GDP in Q2 from 1.17% in Q1 – the fifth consecutive negative quarter. Meanwhile, the BoJ estimates that the economy’s potential growth rate has shrunk to just 0.1%Y/Y – unchanged from that estimated previously. Growth in total factor productivity – which increased to around its decade average – was largely offset by the ongoing downtrend in hours worked, and modest growth in the number of employees was cancelled out by a small decline in the capital stock.

Euro area PPI to flag high price pressures at the factory gate; French manufacturing production and German car sales data also to highlight ongoing supply-side challenges
After Friday’s flash CPI estimate showed consumer price inflation rising to a 13-year high, this morning’s release of producer price data will provide an insight into price pressures at the factory gate. After rising a hefty 2.3%M/M in July, the second-highest monthly increase in 36 years, to leave annual PPI inflation at 12.6%Y/Y, the highest level since the early 1980s, producer prices are expected to have risen notably further in August as wholesale gas prices took off and certain key intermediate items remained scarce.

Higher input cost pressures in the services sector at the end of the third quarter will also be flagged by today’s final PMIs – indeed, the flash release showed the input price PMI jumping to the highest since mid-2008. This survey also reported a further notable decline (2.7pts) in the headline business activity PMI to 56.3, a four-month low. And with no significant revisions to last week’s equivalent manufacturing survey, the composite PMI is also expected to align with the flash release which reported a second successive decline in September, by 2.9pts to 56.1, the lowest reading since April.

We will also get the first of this week’s manufacturing data, with the French IP report due to be published shortly. This is expected to report the third consecutive monthly increase in August (circa 0.4%M/M), albeit risks to this forecast seem to be skewed to the downside not least due to ongoing supply constraints in certain manufacturing sectors, particularly in the autos industry. In this respect, today’s German car registrations and production figures for September are likely to flag persistent weakness in the sector at the end of the third quarter too.

UK new car registrations drop 35%Y/Y in September, weakest for the month since 1998
Like elsewhere in Europe, with the semiconductor shortage hitting production, new car registrations in the UK dropped sharply in September compared to a year ago. Indeed, with production having dropped 27%Y/Y according to the SMMT, new car registrations fell a steeper 35%Y/Y to about 214k, representing the weakest sales for the month since 1998. Sales were down 37% from September 2019. Despite the declines of recent months, new registrations were still up about 6%YTD/Y, but – with the first half of the year distorted in 2020 by the pandemic – the drop of 29% over the first nine months of the year from the same period of 2019 provides a better indication of the performance so far this year. Nevertheless, more encouragingly, sales of electric vehicles reportedly maintained their recent strength, registering their best month on record in September. The detail will be published later this morning, as will the final September services and composite PMIs. According to the preliminary data, the services activity PMI moderated to a seven-month low (55.0), with the detail reporting a slowing in new business and job growth amid accelerated increases in input costs and output prices.

Aside from any developments on Capitol Hill, the focus in the US today will be on ISM services survey & Markit counterpart, together with full trade data for August
While analysts will doubtless be keeping a close eye on any developments on Capitol Hill, today will also bring some important economic data. Most interest will probably centre on the release of the ISM’s services index for September and the final Markit services PMI reading for September. In addition to casting light on the general performance of the largest sector of the economy, with developments in the employment components will likely be analysed especially closely for any clues ahead of Friday’s employment report. Today will also bring the release of the full international trade report for August. Given advance data from the goods sector, Daiwa America’s Mike Moran expects this to reveal a modest narrowing of the overall goods and services deficit to around $68bn.

RBA leaves all policy settings unchanged, as widely expected, remaining upbeat on outlook for activity but cool on inflation
With the RBA’s Board having set out its stall clearly at last month’s meeting, analysts went into this month’s meeting expecting no change in policy. And today the RBA’s Board offered no surprises, leaving all dimensions of its monetary policy settings unchanged. This includes the 0.1% cash rate and the 0.1% target for the April ’24 bond, as well as last month’s decision to continue with asset purchases to $A4bn per week until at least the middle of February next year.

The Bank’s assessment of the economic outlook in the post-meeting statement was also unchanged. While the Delta outbreak has interrupted the recovery, the RBA notes that the impact is uneven, with some areas facing very difficult conditions while others are continuing to grow strongly. And looking ahead, as vaccination rates increase further and restrictions are eased, the RBA continues to expect that the economy will begin growing again in the current quarter and be back around its pre-Delta path in the second half of next year. Indeed, from its business contacts, the RBA argues that many businesses are now planning for the easing of restrictions – including hiring – and that confidence has held up reasonably well.

Despite maintaining an upbeat view on the economy, the Bank’s view on the inflation outlook remains very cool with wage and price pressures continuing to be characterised as subdued. As a result, there was no change to the Bank’s guidance regarding the medium-term outlook for monetary policy. The Board reiterated that it will not increase the cash rate until actual inflation is sustainably within the 2-3% target range, which in the Bank’s central scenario will not occur before 2024.

Finally, the Bank also noted that house prices are continuing to rise and that housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors. The statement notes that the Council of Financial Regulators (which includes the Treasury, APRA and ASIC) has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates, and that it is important that lending standards are maintained and that loan serviceability buffers are appropriate. Doubtless, this issue will be given considerable airplay when the Bank publishes its semi-annual Financial Stability Review on Friday.

Australian trade surplus unexpectedly surges to new record high in August
Turning to today’s Aussie data, following a record trade surplus in July – revised up in today’s release to an even larger $A12.7bn – analysts were expecting the surplus to have narrowed somewhat in August. However, in contrast to that forecast, today the ABS reported that the surplus had increased to a new record high of A$15.1bn in August – no less than A$5bn above the consensus expectation.

In the detail, total exports increased by a further 4.1%M/M in August – thus growing at about that pace for a fifth consecutive month – and so were up a huge 47.6%Y/Y. Exports of goods increased an even greater 4.9%M/M and 57.5%Y/Y. While exports of metal ores fell for the first month since February – with further declines likely over coming months in light of the slide in the price of iron ore – the baton was taken over by very strong growth in shipments of coal, LNG and metals. Less positively, Australia’s ongoing virus outbreak and the resulting suspension of the quarantine-free travel bubble with New Zealand saw exports of services decline a further 2.6%M/M, leaving these exports down 6.4%Y/Y and almost 46% lower than in December 2019.

Meanwhile, after rising almost 4%M/M in July, imports declined 1.5M/M in August, causing annual growth to moderate to 11.0%Y/Y. While imports of consumption goods rebounded 4.3%M/M following declines over the previous two months, both imports of capital and intermediate goods declined (albeit the latter following a near 15%M/M jump in July). As a result of increased freight movements, the import of services increased 1.2%M/M in August. But while these imports were up 15.3%Y/Y, they remained little more than half of their December 2019 level given the curtailment of inbound tourist traffic.

Aussie job ads decline modestly in September; services PMI revised up 0.6pts to 45.5 while weekly consumer confidence measure edges higher
Moving to today’s other Aussie economic news, the ANZ’s measure of Australian job ads declined a further 2.8%M/M in September – the third consecutive decline. However, this represents a very modest fall considering the lockdowns in place in New South Wales, Victoria and Canberra, and leaves the series up 60.1%Y/Y and still more than 22% higher than it stood before the onset of the pandemic – resilience that augurs well for a resumption of strong job growth once restrictions begin to ease.

In other news, the services PMI was revised up 0.6pts to a final September reading of 45.5 – a three-month high, but far below the pre-virus outbreak reading of 56.8 registered in June. In the detail, the new orders index was revised up just 0.1pt to 45.5, although this is 2.2pts firmer than recorded in August. The employment index was revised down 0.2pts to 51.7, but this is an expansionary reading and a sizeable 3.2pts above that recorded in August. Despite today’s outcome, given last week’s small downward revision to the manufacturing PMI output index – which rebounded much more strongly in September – the composite PMI output index was unrevised at 46.0, leaving it 2.7pts firmer than in August but still signalling a contraction in activity overall.

Finally, with households perhaps seeing light at the end of the lockdown tunnel amidst progress on vaccination, the ANZ-Roy Morgan consumer confidence index rose 0.9% to 104.6 last week, thus attaining the highest level since the second week of July. Respondents were slightly more positive about the economic outlook (especially over the longer term) and about recent financial developments in their financial situation (probably influenced by news of the ongoing increase in house prices).

Kiwi business sentiment weakens in Q3 but firms report increased trading activity and more acute skill shortages
Ahead of the RBNZ policy announcement due tonight in European time, at which the Bank is widely expected to lift its cash rate setting for the first time since 2014, today the NZIER published the results of its long-running business survey for Q3. Unsurprisingly, in light of the virus outbreak, a net 8% of businesses said that they expected a deterioration in general economic conditions over the coming months – a turnaround from the net 9% expecting an improvement in the previous quarter. However, a net 29% of businesses reported an increase in their own trading activity. Meanwhile, while firms reported that skill shortages had become more acute, the proportion of firms reporting increasing cost and selling price pressures eased somewhat from the extreme levels in Q2, but with the latter remaining near levels usually only seen at the top of the economic cycle.

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