UK CPI inflation edges lower on hospitality base effects

Chris Scicluna
Emily Nicol

Asian markets mixed as bond sell-off continues after Fed governor comments
Despite September housing starts and building permits falling short of expectations, the S&P500 advanced a further 0.7% yesterday to its highest close since 7 September and now just 0.4% below its all-time high. Investors were buoyed by better than expected corporate earnings from the likes of Johnson & Johnson and Travellers and seemingly unperturbed by a sell-off in the bond market that lifted the 10Y UST to a closing yield of 1.64% – up 4bps to its highest level since May. Of note, while maintaining a central view that inflation will moderate, Fed Governor Waller told a Stanford Institute audience that he was still “greatly concerned” about the risk that elevated inflation will not prove temporary. He added that it would be important to monitor measures of inflation expectations and said that if high monthly inflation prints continue for the rest of this year “a more aggressive policy response than just tapering may well be warranted in 2022”.

Investors have continued to dwell on Waller’s comments during Asian trading, with the 10Y UST yield rising a further 1bps to 1.65% (and trading as high as 1.67%). And with US equity futures fractionally weaker, Asian bourses were rather mixed today with gains largely fading after a positive open. Indeed, in Japan, after matching Wall Street early in the session, the TOPIX closed with a negligible gain. The MoF confirmed that supply chain bottlenecks had crimped Japanese exports in September, with car exports down more than 40%Y/Y, and so the BoJ’s estimate pointed to a 2.8%Q/Q decline in real exports in Q3. The eruption of Mt Aso – Japan’s largest active volcano – also generated headlines, although as yet there has been no impact on flights. In mainland China, stocks are down slightly amidst fading expectations that the PBoC will deliver further policy support, even with new home prices recording their first monthly decline in more than six years. Stocks are also weaker in Taiwan and South Korea. However, the recovery in Hong Kong has continued, with tech stocks helping to deliver a further 1.0% advance in the Hang Seng, which is now almost 10% above this month’s low.

In the Antipodes, Australia’s ASX200 has rallied 0.5% despite a renewed sell-off in the bond market. The 10Y AGCB yield increased 7bps to 1.80% – the highest since May – having traded as high as 1.87% earlier in the session. Increasingly investors seem disbelieving of the RBA’s projection that it will likely not hike its policy rate before 2024, with the April 2024 AGCB also continuing to trade 5bps above the RBA’s 0.1% target. Probably contributing to those doubts is market talk that a mooted future review of the RBA’s policy framework could see the midpoint of the inflation target lowered which, all things equal, would hasten the first rate hike.

Japan’s merchandise trade deficit widens to a 17-month high in September as auto exports fall more than 40%Y/Y due to the virus and supply chain bottlenecks
On the data front, the focus in Japan today was the release of merchandise trade figures for September. In seasonally adjusted terms, Japan’s export receipts declined 3.9%M/M, marking the softest month since February. Combined with the impact of dwindling base effects – exports had grown over 7%M/M in September last year – this caused annual growth in unadjusted exports to halve to 13.0%Y/Y – an outcome that was nonetheless about 3ppts stronger than the pessimistic consensus expectation. Given this outcome, the level of exports now stands at a six-month low and is only 6.4% above the pre-pandemic level reported back in February 2020. As forewarned earlier by production data, this weakening owes to the impact of the virus and associated supply chain bottlenecks on the transport equipment industry (especially autos). Indeed, after increasing almost 12%Y/Y in August, exports of transport equipment slumped 24.5%Y/Y in September – with exports of cars down almost 47%Y/Y – and so subtracted almost 6ppts from overall annual growth in exports. Exports of manufactured goods increased 42.8%Y/Y, which was only slightly slower than in August. Growth in exports of machinery slowed to 23.7%Y/Y from 31.8%Y/Y in August, while growth in exports of electrical machinery was little changed at 16.5%Y/Y.

Meanwhile, after rising more than 4%M/M in August, seasonally-adjusted import values were almost unchanged in September. Given solid growth in the same month last year, annual growth in imports slowed to 38.6%Y/Y from 44.7%Y/Y in August, which was nonetheless about 4ppts firmer than the consensus estimate. More than a third of that annual growth remains due to a near doubling of imports of mineral fuels, which is mostly due to higher prices (petroleum imports increased almost 91%Y/Y, with volumes up just over 15%Y/Y). Large contributions to growth also continue to be made by imports of raw materials (imports of iron ore more than doubling) and chemicals (the latter led, not surprisingly, by an 84%Y/Y increase in imports of medical products). Imports of electrical machinery increased 33.2%Y/Y, while exports of other machinery increased 15.5%Y/Y, collecting explaining slightly more than a fifth of the overall growth in imports over the period. With the resilience of imports surpassing exports, Japan reported a seasonally-adjusted deficit of ¥625bn in September, which was the was the largest deficit since April last year and slightly wider than market expectations.

As usual, a short time ago, the BoJ released its analysis of the export and import data, helpfully adjusting the MoF’s statistics to remove the influence of both seasonality and changing prices. Sadly, the BoJ’s estimates cast real exports in an even weaker light, with volumes assessed to have slumped 6.7%M/M in September. This follows an unrevised decline of 3.7%M/M in August and means that real exports have fallen to their lowest level in 12 months. Indeed, while real exports were still up 1.5%Y/Y, they were almost 3% lower than in February 2020. Given this poor result, real exports declined 2.8%Q/Q in Q3, marking the first negative quarter since Q220. Meanwhile, the BoJ estimates that real imports declined just 0.1%M/M in September, albeit causing annual growth to slow 2.5ppts to 8.5%Y/Y. Given a weak start to the quarter, real imports fell 1.6%Q/Q in Q3 – less than the decline in exports and so suggesting that net merchandise exports might have made a small negative contribution to GDP growth in Q3 (the preliminary figures for Q3 will be released in mid-November).

The BoJ will release more details regarding the commodity breakdown and destination of these exports next week. In the meantime, the MoF’s own volume estimates indicate that exports to the US declined 9.9%Y/Y – a sharp turnaround from the 13.2%Y/Y growth reported in August and on top of a 6.2%Y/Y decline in September last year. Growth in exports to the EU slowed to 18.6%Y/Y from 30.9%Y/Y previously, which was insufficient to erase the previous year’s 23.3%Y/Y decline. Growth in exports to Asia slowed only slightly to 9.1%Y/Y from 11.2%Y/Y previously, with growth in exports to China slowing to just 3.3%Y/Y. However, exports to China had increased almost 16%Y/Y in September last year, whereas exports to Asia overall had declined almost 4%Y/Y.

China’s loan prime rates once again unchanged this month; new home prices record first monthly decline in more than six years
Rather than supporting the economy through lowering interest rates – and so perhaps encouraging non-productive investment – at present the PBoC appears to favour adding support by offering greater market liquidity and encouraging banks to extend credit at prevailing rates. So as most analysts had expected – especially with the 1Y MLF rate held at 2.95% at last week’s auction – today the PBoC left its published prime loan rates unchanged for an 18th consecutive month, with the 1Y loan prime rate (the benchmark for corporate loans) left at 3.85% and the 5Y loan prime rate (the benchmark for mortgages) left at 4.65%.

On the data front, following on from soft activity data at the beginning of this week, today China reported that prices fell in 36 of its 70 largest cities in September, up from just 20 cities in August. As a result, the average price declined 0.08%M/M – a modest drop, but nonetheless the first since April 2015 – and annual growth in prices slowed 0.4ppts to 3.3%Y/Y. Existing home prices were a little weaker still, declining 0.2%M/M on average and so causing their annual growth to slow 0.5ppts to 2.4%Y/Y. The slowdown has been led by a rapid cooling of prices in so-called first-tier cities, where prices had been rising relatively quickly around the middle of this year. For example, new home prices were steady in Beijing and down 0.1%M/M in Guangzhou – cities where prices had risen about 1%M/M back in June.

UK CPI inflation edges lower in September on hospitality base effects; but many other categories up again as is PPI inflation
UK CPI inflation unexpectedly slowed slightly in September, moderating 0.1ppt from the prior month’s nine-year high to 3.1%Y/Y. Core inflation dropped too, down 0.2ppt to 2.9%Y/Y. But this merely represents a pause in the uptrend, which will resume in October due to higher household energy bills and is set to last through to Q2 next year. Indeed, the declines in both headline and core measures were principally due to inflation of restaurants and hotels, which dropped a chunky 3.5ppts to 5.1%Y/Y reflecting base effects from the ending of the government’s subsidies a year earlier – prices in the sector still rose this September but not by as much as last September. The clothing component (down to a 5-month low of just 0.6%Y/Y) also subtracted from overall inflation. But most other components increased. In particular, transport inflation rose further due to higher airfares and used cars (now up 21.8% since April), while furniture and other household goods (up 0.8ppts to 4.5%Y/Y), and food and beverages (up 0.5ppt to 0.8%Y/Y) also made positive contributions again.

Up the pipeline, UK producer price inflation rose once again with the input PPI rate up 0.2ppt to 11.4%Y/Y and output PPI rate up 0.7ppt to 6.7%Y/Y. One driver was energy prices, in particular prices of petrol and crude oil (up almost 4ppts to 24.2%Y/Y), although core producer output inflation rose a further 0.4ppt to 5.9%Y/Y, the highest since 2008 on higher prices of transport goods as well as metals, machinery and equipment. We expect further pass-through from PPI to consumer price inflation over coming months.

German producer price inflation up again by more than expected to highest since 1974; final euro area CPI data for September ahead later this morning
Ahead of the final euro area CPI release later this morning, German PPI inflation data already released again highlighted price pressures emanating not least from power markets. Indeed, German producer prices again surprised significantly on the upside, with prices up by a record 2.3%M/M in September, to leave the headline PPI rate up 2.2ppt to 14.2%Y/Y, the strongest annual increase since October 1974, when prices were impacted by the first oil crisis. The main contributor was energy, prices of which rose a whopping 8%M/M to push the annual rate up to a new series high of 32.6%Y/Y, with pressures driven by natural gas, prices of which rose 15%M/M to leave them up a record 247%Y/Y. The increase in prices of intermediate was more modest (0.8%M/M), nevertheless leaving them up 17.4%Y/Y, while prices of consumer durables were up just 3.2%Y/Y and non-durables by 2.2%Y/Y.

Turning to euro area consumer prices, in line with the final national numbers published last week and flash figure, the final estimate of headline euro area inflation will likely jump 0.4ppt to 3.4%Y/Y, a thirteen-year high. While this increase was principally driven by energy, according to the flash estimate core inflation also jumped to a thirteen-year high of 1.9%Y/Y. Today’s release will provide a comprehensive breakdown by goods and services, and therefore an update on trimmed mean and super core (excluding energy and selected food) estimates, which in August stood at 2.4%Y/Y and 1.7%Y/Y respectively.

FOMC minutes and corporate earnings the focus in the US today
A lull in the economic data flow means that the focus in the US today will be on Fed commentary and further corporate earnings news. The former includes the release of the minutes from last month’s FOMC meeting, at which Fed raised its outlook for inflation and slightly advanced the projected timing of the first policy tightening. In addition, Fed Governor Quarles will speak on the economic outlook at an event hosted by the Milken Institute. Meanwhile, today’s corporate earnings diary includes reports from the likes of Tesla, IBM and Verizon.

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