Japan’s retail sales hit by a surge in coronavirus cases in the New Year
Given the surge in coronavirus cases across Asia since the start of the year and renewed containment measures, today’s Japanese data predictably signalled a subdued start to the year for the economic recovery, with output and spending having gone into reverse in January. Certainly, the decline in retail sales was larger than had been expected, with sales down for a second successive month, by 1.9%M/M, taking the level to a five-month low. The weakness principally reflected a near-17½%M/M drop in clothing sales, the most since July 2020, with spending on day-to-day items down almost 9%M/M. And not least given the reduced opportunities to travel, spending on fuel fell for the third consecutive month. Overall, this left sales more than 2% lower than the Q4 average. And with consumer confidence at its lowest level since August, households’ willingness to buy durable goods at a twelve-month low, and little sign of pickup in higher frequency data, there is a sizable risk that household consumption will be a drag on GDP growth in Q1.

Japanese autos output slump as supply bottlenecks persist; MoF capital spending, consumer confidence and labour market data to come this week
Industrial production also fell back in January for the second successive month, by 1.3%M/M, to leave it some 3½% lower than the pre-pandemic level, with seemingly increased disruption to output from an intensification in pandemic-related supply constraints. Indeed, the decline was overwhelmingly driven by a 17½%M/M drop in autos output, while production of iron and steel and ICT equipment was down around 3%M/M. In contrast, production of general and electrical machinery (+3.8%M/M and 5.3%M/M respectively) reversed the declines in December, while electronic parts and devices output jumped 10.4%M/M, the most in a year. Overall, manufacturing output was little changed (+0.2%) from the Q4 average. And today’s METI survey suggested that manufacturers remained upbeat about the near-term production outlook, forecasting growth of 5.7%M/M in February. Admittedly, these forecasts are typically far too optimistic. And with inventories having fallen by 1.8%M/M, of which auto inventories were down by almost 10%M/M to an 18-month low, any recovery in production looks set to be limited by ongoing supply bottlenecks.

Looking ahead, tomorrow’s final February manufacturing PMI survey is expected to confirm the steep decline in the output component reported in the flash release – by more than 6pts to 48.7 – while vehicle sales numbers for the same month are expected to report ongoing weakness given production limitations. Wednesday’s release of the MoF’s capital spending survey will provide an update on corporations financial performance in the last quarter of 2021, with profits and sales likely to have been boosted by the relaxation of pandemic-related restrictions. But given renewed containment measures to counter the latest Covid wave, the final services PMIs (Thursday) is likely to confirm a significant hit to activity in February – the flash index fell almost 5pts to 42.7. The latest consumer confidence survey due the same day will also likely flag a deterioration in confidence not least reflecting signs of higher inflation. Finally, the latest labour market numbers for January are due on Friday and expected to show the unemployment rate moving sideways at 2.7%.

ECB GovCo members to speak ahead of next week’s policy meeting
Ahead of the ECB’s policy meeting next Thursday, and before events in Ukraine escalated so appallingly, members of the Governing Council had appeared to agree that the outlook merited a swifter phasing out of net asset purchases and gradual normalisation of policy thereafter. Since the Russian invasion, however, the extremely uncertain impact on financial markets, energy prices, confidence, and demand means that the ECB will have to move forward even more tentatively. At the same time, however, divisions among members of the Governing Council appear set to widen once again, with hawks likely to be alarmed by the prospect of yet another inflationary impulse from energy and commodity prices, but doves to be wary of risks of recession, financial instability and damage to the financial transmission mechanism.

So, markets will watch this week for commentary from Governing Council members on the possible impact of the Ukraine outlook before the pre-meeting seven-day blackout period kicks in. The normally highly dovish Executive Board member Panetta is scheduled to speak this morning while President Lagarde will speak at a Women in Economics Event this afternoon. On Wednesday Chief Economist Lane might elaborate on his assessment, reported at the end of last week, that the increase in energy prices might subtract 0.3-0.4ppt from GDP growth under a central scenario but 1.0ppt under a severe scenario. And from the hawkish end of the spectrum, Bundesbank President Nagel will speak publicly on Wednesday, with his institution having already flagged the possibility of a Covid-induced technical recession around the turn of the year. Separately, the account of the ECB’s February policy-setting meeting will be published on Thursday, although any detailed debate on the near-term policy profile will have been subsequently superseded by the past week’s events.

Euro area inflation (Wednesday) set to hit new high above 5½%Y/Y; unemployment and retail sales data also due
Data-wise, this week brings preliminary February inflation figures from Germany and Italy (tomorrow) and the euro area as a whole (Wednesday). The Spanish numbers just released came in well above expectations, with the HICP inflation rate jumping 1.3ppts to 7.5%Y/Y, a new series high. The national CPI measure similarly also rose 1.3ppt, to 7.4%Y/Y. While there was no detailed breakdown, the statistical office noted that there was a generalised increase in most components in February, to leave the national core CPI measure up 0.6ppt to 3.0%Y/Y, the highest since September 2008. We expect to see broad-based pressures also to continue to exert upward pressure on the euro area headline HICP rate, which we forecast to rise 0.5ppt to a new series high of 5.6%Y/Y. And having dipped to 2.3%Y/Y in January, thanks principally to the timing of tax changes and New Year, we also expect the core CPI rate to rise to 2.6%Y/Y.

Other euro area data due this week include unemployment figures on Thursday and retail sales on Friday. Having declined for the eighth successive month in December to a series low of 7.0%, the unemployment rate might have moved sideways at the start of the year as the latest pandemic wave tempered jobs growth. However, euro area retail sales are likely to reverse some of the weakness seen in December, with growth of around 1½%M/M following the 3.0%M/M decline previously.

A quieter week for UK data starts with bank lending figures today; UK MPC members to speak tomorrow and Wednesday:
The BoE MPC members due to speak publicly this week are Saunders and Mann (tomorrow), both of whom voted for a hike of 50bps in Bank Rate earlier this month, and Tenreyo and Cunliffe (Wednesday). On the data front, it should be a relatively quiet week for top-tier UK releases, beginning with bank lending figures for January today. Consistent with stronger retail sales last month, we would expect to see a further increase in consumer credit in January, while demand for secured lending likely remained robust in line with ongoing strength in the housing market. Meanwhile, the BRC shop price index for February on Wednesday will provide an early indication into inflation on the high street, with the survey’s headline rate having risen in January to the highest since 2012.

Jay Powell to speak Wednesday; labour market report the highlight of a busy week for US data
All eyes will be on Fed Chair Powell’s testimony to Congress on Wednesday. The economic impact of events in Ukraine will be much less forcefully felt in the US than Europe, due to a much smaller trade relationship and much lesser reliance on imported energy. And the Fed will be less concerned about any tightening of financial conditions too. So, Powell will certainly signal ongoing tightening ahead, and seems unlikely to invalidate current market pricing of roughly 150bps-worth of hikes this year. Data-wise, Friday’s labour market report is the highlight of a busy week. Daiwa America’s Mike Moran expects growth in non-farm payrolls to come close to the 467k average of the prior 12 months, but rising labour force participation could leave the unemployment rate unchanged at 4.0%. Among other data due, the preliminary goods trade report for January comes today, with the deficit expected to narrow back below $100bn from December’s record, with imports softer and exports likely a touch firmer. Tomorrow brings the manufacturing ISM survey, with the non-manufacturing counterpart due Thursday.

Chinese PMIs to be consistent with a subdued and slowing economy in need of stimulus
Finally, tomorrow brings China’s official PMIs for February. The manufacturing PMI is expected to drop below 50 into contractionary territory for the first time since October, weighed by efforts to suppress outbreaks of Covid-19 as well as constraints on production during the Winter Olympics. The non-manufacturing indices are also expected to signal slowing activity in the sector as the pandemic impeded spending during the Lunar New Year holiday. Overall, the composite PMI could well fall to the lowest since August, suggestive of a subdued economy that calls for further policy stimulus.