Euro area flash CPI estimate set to jump to a fresh euro-era high

Chris Scicluna
Emily Nicol

Japan’s IP grows a touch less than expected in October despite acceleration in autos output; unemployment rate fell but so did employment
Japanese industrial production grew in October for the first month in four. But the 1.1%M/M rebound was almost half the Bloomberg consensus expectation and fell well short of what firms had forecast last month (6.6%M/M). Moreover, it was small beer compared with the more-than 10% cumulative drop between June and September. And so, industrial output was still more than 8% lower than the pre-pandemic level.

Within the detail, following the acute weakness during the third quarter, growth in October was driven by the autos sector, with output rising 27.8%M/M and contributing 3ppts to monthly production growth, albeit remaining more than 40% below the pre-pandemic level. Overall, output of durable consumer goods rose 22.6%M/M in October, production of non-durables rose for the second successive month (albeit by a more modest 1.4%M/M). While production machinery and general-purpose and business machinery rose, production of capital goods slipped back slightly in October (-1.3%M/M) when excluding transport equipment. In additional, production of construction goods fell for the second successive month (down 1.4%M/M), while output of chemicals, metals and electronic parts and devices also weighed. Elsewhere in the survey, today’s data showed that the rebound in output led to the first increase in shipments (2%M/M) since June, while inventories moved sideways.

Encouragingly, firms remain extremely optimistic about the near-term outlook, forecasting production growth of 9%M/M in November and 2.1%M/M in December. So, although manufacturers tend to be too optimistic in formulating their forecasts for this survey, in the absence of renewed pandemic-related disruptions and bottlenecks, Japan’s manufacturing sector should return to growth in the fourth quarter.

Given the relaxation of restrictions at the start of October and the sharp decline in coronavirus cases in Japan, today’s labour market data reported a surprising further drop in the number of people employed that month. Indeed, total employment fell an estimated 240k to the lowest level since the start of 2018 and more than 1.1mn (1.8%) lower than the pre-pandemic level. But given that larger decline in the labour force (350k) last month taking the labour force participation rate to a seven-month low of 62%, the unemployment rate fell 0.1ppt to 2.7%. There was also an unexpected easing in the effective job-to-applicant ratio in October, by 0.01ppt to 1.15 (still the second-strongest reading since May 2020) as growth in total applicants marginally exceeded the number of job offers. Indeed, while the number of job offers were more than 8 ½% higher than a year earlier, they remained more than 10% lower than the pre-pandemic level.

Chinese PMIs beat expectations with output firmer and price pressures easing
Today’s official Chinese PMIs for November beat expectations, not least with the manufacturing PMI rising 0.9pt to 50.1 to suggest stability in the sector after two successive sub-50 readings. The detail was even more favourable than the headline index. With power outages less widespread, the factory output PMI jumped 3.6pts to a six-month high of 52.0 from 48.4 in October. The new orders and export orders PMIs also improved, although both remained below 50. Thanks not least to lower energy prices, the manufacturing input price PMI fell sharply, by almost 20pts to 52.9, while the factory output price PMI dropped more than 12pts to 48.9, suggesting downwards pressure on inflation. And evidence of easing supply bottlenecks came from the supplier delivery times index, which rose 1.5pts to 48.2, the best since July.

China’s non-manufacturing PMI also beat expectations, easing just 0.1pt in November to 52.3. While the services index fell 0.5pt to 51.1, the construction PMI rose to a three-month high of 59.1, as increased infrastructure activity more than outweighed a softening in real estate. Like for manufacturers, the detail of the non-manufacturing survey reported a notable easing of prices pressures, with the input price PMI down 7pts to just 50.8 and the selling price PMI down 2.6pts to just 50.1.

Euro area flash CPI estimate set to jump to a fresh euro-era high in November as French figures also beat expectations; French spending on goods down in October; German jobless data to come
All eyes today will be on the flash euro area CPI estimate for November, which is expected to have taken a further notable step up. After upside surprises to yesterday’s German, Spanish and Belgian figures, the equivalent French figures released this morning also beat expectations. French inflation on the EU-harmonised HICP measure rose 0.2ppt to 3.4%Y/Y, the highest since 2008, with the national CPI measure up a similar 0.2ppt to 2.8%Y/Y. So, assuming only a modest upwards shift in the Italian inflation figures, the euro area’s headline inflation rate will increase from October’s euro-era high of 4.1%Y/Y to at least 4.7%Y/Y. While in part that will be driven by higher energy prices, we expect core inflation also to rise at least 0.3ppt to 2.3%Y/Y, which would be the highest for more than 19 years.

The October figures for French consumer spending on goods also released this morning suggested that households remained cautious at the start of the fourth quarter. Tallying with the BoF retail sales survey, the INSEE measure of consumption of goods fell 0.4%M/M to leave it down by more than 5%Y/Y and still almost 2% lower than the pre-pandemic level. Within the detail, purchases of durable goods fell sharply as sales of new autos remained extremely weak, while spending on furniture also declined. Clothing purchases also reversed some of the marked increase seen in September. So, in the absence of improved spending on food (0.7%M/M) and energy (1.0%M/M), the drop in spending last month would have been even steeper.

Later this morning German labour market figures are likely to reveal that joblessness fell further in November, albeit leaving the unemployment rate unchanged at 5.4%. After final French GDP data for Q3 confirmed growth of 3.0%Q/Q (3.3%Y/Y), the equivalent data from Italy are likewise expected to confirm the earlier estimate of growth of 2.6%Q/Q (3.8%Y/Y).

UK business survey suggests slight softening of sentiment
Broadly consistent with the flash PMIs, which suggested that activity remained firm in November, the Lloyds business barometer released overnight suggested that UK corporate sentiment remains relatively elevated, albeit slightly softer for a second successive month. As last month, the headline sentiment index fell 3pts, but at 40 it was still above the long-run average (28). The index for firms’ trading expectations for the coming twelve months also fell 3pts to a three-month low (39), with 52% of firms expecting stronger trading conditions and 13% expecting a deterioration. A series high of 50% of firms expect to raise prices while 6% plan to cut prices. The survey index of hiring intentions fell 7pts to 30%, with still almost half of all firms expecting to increase headcount over the coming year. Pay growth expectations remained broadly steady from October, with one quarter of firms expecting to offer average wage growth of 3% or more, but 9% of firms anticipating a pay freeze.

Beyond the economic data, BoE policy maker Catherine Mann (the newest external MPC member) will have a fireside chat about the UK economy, at which she might hint at how she will likely vote at next month’s key monetary policy meeting. Given the uncertainty surrounding the Omicron variant, we doubt that she will vote for a hike just yet.

US consumer confidence set to slip back; Powell to testify to Congress
In the US, today brings the Conference Board’s latest consumer survey for November. Despite the strong labour market and elevated equities, the headline sentiment index looks set to fall back slightly this month as high inflation remains a major concern to households. This afternoon will also bring the FHFA and Case-Shiller home price indices for September. Beyond the data, Chair Powell will testify to Congress, expanding on his remarks already circulated in advance and with the impact of the Omicron variant clearly a key focus; in addition, Vice Chair Clarida will give a speech on ‘Federal Reserve Independence: Foundations and Responsibilities’. 

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