Japan's flash PMIs highlight the new pandemic hit to services

Chris Scicluna
Emily Nicol

Japanese flash PMIs highlight the new pandemic hit to services activity
Today’s flash PMIs for January are widely expected to suggest subdued conditions in the services sector in the New Year in many countries battling with another wave of Covid-19. This was evident in Japan, where a sharp hit to consumer-facing services saw the overall services activity PMI plunge 5.5pts – the most since April 2020 at the onset of the pandemic – to 46.6, the weakest reading since August when the country was facing the rise of the Delta variant. New business in the sector was similarly softer in January (the relevant index fell 5.2pts to 47.9) while the employment component (down 2.5pts to 47.1) implied the weakest jobs growth since May 2020.

The outlook for Japanese manufacturers was somewhat more encouraging. For example, the output PMI rose 0.3pt to 53.6, the second-strongest reading since May and consistent with ongoing steady recovery in the sector. And encouragingly with respect to the near-term production outlook, firms reportedly replenished their inventories at the fastest pace since the start of 2018, with another pickup in new orders for which the relevant index rising to its highest since last April. But with input price pressures still extremely elevated despite a modest easing last month, there was further evidence that these higher input costs were being passed on to consumers, with the output price PMI jumping 2.5pts to 58.6, the highest since mid-2008. So, while reported inflationary pressures were largely absent in the services sector, this left the composite output price PMI at 52.8 – while low compared with the equivalent indices in other G7 countries, this was nevertheless one of the highest readings for Japan since the series began in 2007. Overall, the composite output PMI fell 3.7pts to 48.8, the weakest for four months but still consistent with only modest contraction at the start of 2022.

The remaining data releases this week will be focused on inflation, with the BoJ’s estimates of underlying inflation for December, including the trimmed mean CPI measure, due tomorrow. Services PPI numbers (also for December) are due Thursday, while Friday will bring the Tokyo CPI release for January. Despite the additional pipeline pressures reported in today’s flash January PMIs, expectations are for a modest easing in the headline Tokyo inflation rate to 0.5%Y/Y, while the BoJ’s preferred core measure of Tokyo inflation (excluding fresh foods and energy) is forecast to fall further into negative territory to as low as -0.7%Y/Y.

All eyes on FOMC and Powell’s press conference for clues on policy outlook
The main event of the week will certainly be the conclusion of the Fed’s latest policy meeting on Wednesday. As Fed Chair Powell has been clear that the FOMC will not hike short-term interest rates until the asset purchase program has been completed, and that point will not be reached until mid-March, no meaningful changes will be made to policy at this week’s meeting. According to Daiwa America’s Mike Moran (whose preview can be read here), the most we might expect from the policy statement and the press conference is an explicit message that the FOMC will likely raise rates shortly after the end of QE. Of course, journalists at the press conference Q&A will push Powell on the likelihood that the Fed will lift off with a 50bp hike. The Fed Chair might want to leave his options open this week, although in due course Mike would be surprised to see anything other than a hike of 25bps in March. However, while the FOMC might not reach agreement on its plans for quantitative tightening this week, Powell might give some hints on the timing and pace of eventual shrinkage of the Fed’s balance sheet in his press conference.

Data-wise, the coming week brings the first estimate of US Q4 GDP (Thursday), which Mike forecasts will reveal growth of 5.8%Q/Q annualised to be about 2.7% above pre-pandemic level in Q419 but still roughly 1.1% below the pre-Covid trend. Much of the growth in Q4 is likely to have been driven by inventory investment, while real final demand is likely to be up only about 2.5%Q/Q annualised. And GDP growth in Q1 is likely to be softer not least due to the effect of Omicron. Among the other data due this week, which seems likely to highlight the softening in momentum around the turn of the year, only the January Markit flash PMIs and December Chicago Fed National Activity Index are due today. The January Conference Board consumer confidence survey results come tomorrow, with December advanced goods trade and new home sales (Wednesday), preliminary durable goods orders (also Thursday) and personal income, spending and associated deflators (Friday) also of note. With respect to the latter, Mike expects to see a drop in personal spending of 0.4%M/M bit a rise in core PCE deflator of 0.5%M/M taking the annual rate to 4.8%Y/Y, which would be the highest since 1983.

German, French and Spanish Q4 GDP data to show sharp slowdown in euro area growth; flash PMIs to signal further weakening in services at the start of the year
Like in the US, this week brings the first estimates of Q4 GDP from certain large euro area member states with data from Germany, France and Spain coming on Friday. With a new wave of coronavirus underway in the final months of 2021, and supply bottlenecks limiting production, growth seems bound to have slowed sharply. Among the larger member states, the slowdown will be most pronounced in Germany, where we expect that output contracted by about 0.5%Q/Q. Surveys suggest that France fared better, with growth of about 0.6%Q/Q or more. And given the recent strength in retail sales and industrial output, Spanish GDP is forecast to have expanded by more than 1%Q/Q.

The rest of the week’s euro area dataflow will be dominated by economic surveys, kicking off today with the flash PMIs, which are expected to suggest a weakening in services activity in the face of the accelerated spread of coronavirus cases across the region. But reflecting a modest easing in supply constraints, expectations are for a modest improvement in manufacturing conditions. Among other surveys, the Commission’s detailed sectorial confidence survey will be published on Friday with Germany’s ifo business survey coming tomorrow.

Italy’s Presidential election starts today, with outcome possible later in the week posing risks to BTPs
Beyond the economic data, a special joint session of Italy’s parliament will this afternoon begin voting to elect a new national President for a seven-year term – a process likely one way or the other to have an impact on BTPs. Italy’s President is head of state and guardian of the national Constitution, with important powers – including the ability to dissolve Parliament and provide mandates to form a government – that can support stability in the otherwise political volatile country. In the first three rounds of voting, a two-thirds majority is required to win the Presidency. If no one has succeeded by then, only a simple majority will be required from Thursday on. The process is likely to take several days, with the aim to conclude the election by 3 February when the term of current President, the respected Sergio Mattarella, expires.

As an extraordinary person in terms of domestic and international credibility and skill-set, and possibly the only one capable of securing the support of all of the parties currently backing the government, the favourite to be elected President is Prime Minister Mario Draghi. The likelihood of that prospect was illustrated on the weekend when former PM Berlusconi abandoned his own campaign for the role, which had anyway looked absurd. Draghi’s appointment as head of state would obviously leave a vacancy as head of government. So, under such a scenario, a deal to appoint a new technocrat PM – perhaps current Minister of Justice Marta Cartabia, Minister of Finance Daniele Franco or Minister of Public Administration Renato Brunetta – would also likely be required to provide reassurance to investors that the country’s Recovery and Resilience Plan would continue to be implemented this year to unlock further sizeable disbursements of EU funds. Without such a deal, the risks of a period of renewed uncertainty and inertia in government, and perhaps an early general election – which might be expected to deliver a majority for the centre-right led by the populist and Eurosceptic Brothers of Italy and League – would unsettle investors and push BTP spreads higher. Should Draghi not be appointed President, he would be expected to continue to lead the government through to 2023, when the next general election is due.

UK flash PMIs kick off a data calendar dominated by sentiment surveys
With new daily coronavirus infection rates having eased back over recent weeks, today’s UK flash PMIs might, in contrast with the euro area and Japan, suggest some stabilization in activity at the start of the year. Admittedly, Covid cases still remain considerably higher than during much of December and so we anticipate little improvement in the services PMI this month. But with restrictions being eased, forward-looking indicators should be brighter. Tomorrow brings the release of the CBI’s industrial trends survey, which will be followed on Thursday by the CBI’s retail sales survey. Tuesday will also bring the latest public finance figures for December to be published amid widespread calls, reportedly including from within the Cabinet, for the government to postpone its planned increases in National Insurance Contributions planned for April and take action to tackle the impact of further rises in household energy bills.

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