Japanese manufacturers remain downbeat

Chris Scicluna
Emily Nicol

Chinese PPI inflation exceeds expectations at 26-year high on supply strains, CPI higher on vegetable prices but still subdued
China’s CSI300 index eventually closed down just 0.5% today. But at one stage in the session it was down almost 2% from yesterday’s close, upset by the upside surprises in today’s Chinese inflation data. Most striking, producer price inflation rose 2.8ppts – and more than 1ppt above the consensus expectation – in October to 13.5%Y/Y, the highest since 1995. Just as seen recently in Europe and the US, pressures in Chinese PPI were predictably much more acute in inflation of mining and quarrying items (up more than 17ppts to 66.5%Y/Y), raw materials (up more than 5ppts to 25.7%Y/Y) as well as certain intermediate items, as supply bottlenecks continued to bite. For example, within the detail, prices of coal more than doubled from a year ago while prices of petrol and natural gas were up 60%Y/Y. Pressures were also reported in chemicals (32%Y/Y) and ferrous metals (17%Y/Y) and non-ferrous metals (13%Y/Y). Of course, with coal prices having fallen by more than half since mid-October in response to government measures aimed at easing power outages, producer price inflation should moderate somewhat in November.

Overall, factory gate inflation of producer goods rose 3.7ppts to 17.8%Y/Y in October. But producer prices of consumer goods accelerated just 0.2ppt to a still-low 0.6%Y/Y, with factory gate inflation of durable consumer goods down 0.3ppt and falling back into negative territory at -0.1%Y/Y. That highlights the relatively limited pass-through of pressures further up the supply chain and the associated squeezing of margins for manufacturers. Indeed, while it rose a slightly larger than expected 0.8ppt, at 1.5%Y/Y consumer price inflation remained very subdued by international standards against the backdrop of soft consumer spending. Indeed, the increase was primarily driven by pressures in the fresh vegetable component (up more than 18ppts to 15.9%Y/Y) with inflation of fresh fruit and meat, and transport and communications also higher, the latter driven higher by fuel prices. So, core inflation (ex food and energy) was up just 0.1ppt to 1.3%Y/Y. With consumer price inflation still just half of the authorities’ target for the year, the rise will certainly not be an obstacle to a cut in reserve requirements to assist the adjustments associated with stresses in the real estate sector.

Japanese manufacturers remain downbeat as supply constraints persist
After Japanese economy watchers were considerably more optimistic about economic conditions in October, today’s monthly Reuters Tankan survey of Japanese businesses offered a more somber assessment of conditions in November. This was particularly evident among large manufacturers, where the headline index fell a further 3pts on the month to +13, a seven-month low as concerns about supply constraints persisted. Like in the other major economies, auto manufacturers in Japan are by far the most pessimistic, with the relevant DI rising just 2pts to a still very downbeat -29. And while the equivalent DIs for electrical and general machinery and metal producers remained comfortably in positive territory – i.e. optimists outweigh the pessimists – there was a noticeable loss of momentum this month, with the latter two at an eight-month and seven-month low respectively.

Given the lifting of coronavirus restrictions at the end of September, the improvement in the non-manufacturing DI was disappointing, up just 2pts to +1, merely a three-month high. This partly reflected ongoing pessimism among construction firms – no doubt reflecting to some extent supply difficulties – with conditions in that sector expected to remain challenging over the coming three months too. Meanwhile, retailers were similarly downbeat, albeit to a lesser extent than in October. But conditions were forecast to improve considerably over the coming quarter. And Japanese wholesalers were already more upbeat in November, with the relevant DI implying the most optimism since April 2019, with firms in the info and communications sub-sector also the most upbeat about conditions since June. Overall, non-manufacturers expected conditions to return to their most favourable since the onset of the pandemic by February.

German HICP inflation confirmed at euro-era high of 4.6%Y/Y in October but core inflation unchanged; Italian IP likely little changed in September
A relatively quiet day for top-tier euro area releases kicked off this morning with updated German inflation numbers for October. These aligned with the flash estimates that showed the harmonised HICP rate jumping 0.5ppt to 4.6%Y/Y, a euro-era high, while the national measure of inflation rose 0.4ppt to 4.5%Y/Y, the highest since September 1993. Within the detail, the increase last month was principally driven by the energy component, which jumped 4.3ppts to 18.6%Y/Y, as the price of heating oil doubled compared with a year earlier, prices of motor fuels rose 35%Y/Y and prices of natural gas (7.4%Y/Y) and electricity (2.5%Y/Y) ticked higher too. But other goods inflation shifted higher too, including durable consumer goods prices (3.7%Y/Y) being driven higher by rising vehicle costs (7.2%Y/Y). In contrast, services inflation edged slightly lower (2.4%Y/Y) from the more than six-year high recorded in September. So, overall, the national core CPI rate moved sideways at 2.9%Y/Y.

Later this morning, Italian industrial production numbers for September will be released. After last week’s weak outturns from Germany and France, these are likely report that Italian manufacturers fared slightly better than their counterparts in the largest two member states at the end of Q3. In particular, IP is expected to have fallen just 0.1%M/M in September, to leave it up 1%Q/Q over the third quarter as a whole.

US consumer price inflation the main event
All eyes later today will be on the US October CPI numbers. These are expected to show that higher energy and food prices remained a key driver of inflation last month, with some further signs of underlying price pressures starting to feed through too. Daiwa America’s Mike Moran expects to see a rise of 0.5%M/M in the headline CPI, which would likely take the annual rate of inflation up 0.4ppt to 5.8%Y/Y, the highest since 1990. But even when excluding food and energy, prices are forecast to have risen for the ninth consecutive month. With the impact of Covid-related discounting that weighed in September set to have diminished, Mike expects the core CPI to rise 0.4%M/M to push the annual rate back up to 4.3%Y/Y.

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