ECB policy meeting account superseded by events in Ukraine

Chris Scicluna
Emily Nicol

Japanese consumers more downbeat as inflation concerns rise; but services survey suggests firms in the sector continue largely to absorb cost pressures
With the number of new coronavirus cases still high and containment measures having been extended in Japan, the latest consumer confidence survey was predictably downbeat. In particular, the headline confidence indicator fell for the third consecutive month in February, by 1.4pts to 35.3, a nine-month low. The weakness was widespread, with households’ assessments of their overall livelihood declining to the lowest for more than a year. And so perhaps inevitably, the survey suggested that consumers were their least willing to buy durable goods since July 2020.

While this in part reflects continued economic uncertainty related to the pandemic, consumers appear to be increasingly mindful of rising prices. Today’s survey showed that the share of households expecting prices to rise over the coming twelve months had risen to more than 90% for the first time since the series began in 2004. And this tallies with other signs that Japan’s price pressures are gradually becoming more broad based. For example, with the share of the CPI basket rising to more than 60%, Japan’s trimmed mean CPI rate (which excludes 10% of the items with the largest increases and declines) recently rose to the highest since 2014, albeit at 0.9%Y/Y it remains in a minor league compared to the inflationary pressures in other G7 economies – the equivalent trimmed mean CPI rates in the US and euro area in January stood at 5.4%Y/Y and 3.7%Y/Y respectively.

This notwithstanding, the final services PMI also published today suggested that firms in the sector continue to largely absorb higher input costs. Indeed, while the input price PMI rose 0.7pt to 57.8 in February, the second–highest reading since 2008, the output price PMI fell for the third month out of the past four to 49.7. This in part reflects the ongoing weakness in demand in the sector – despite a modest upwards revision from the flash release, the headline activity index fell a further 3.4pts to 44.2, with the new business component down 2.3pts to 46.5, both the lowest readings since August.

Against this backdrop, BoJ Policy Board member Junko Nakagawa today repeated recent commentary from Governor Kuroda that Japan’s ultra-accommodative policy measures were judged still to be appropriate. While acknowledging that inflation might well rise close to the Bank’s 2% target in April as base effects associated with government policy fall out of the calculation, she reiterated that the Bank’s goal was to see inflation at that level for a sustained period. She noted that the direct trade fallout from the Ukraine conflict would be limited – exports from Russian accounted for just 1% of total exports in 2021, and total imports from Russia account for less 2%, with the share of energy imports only a touch higher at 5½% - very low compared to Europe’s exposure. Not least reflecting the increased uncertainties, she acknowledged that the Bank needed to mindful of both upside and downside risks for inflation.

Euro area PPI inflation to hit record high, unemployment rate to fall to series low; ECB policy meeting account due to be published but now superseded by events in Ukraine
Today will bring the publication of the ECB’s February policy-setting meeting, when the Governing Council acknowledged that its inflation forecasts published in December were way too low and so its policy plans for coming quarters would need to be adjusted this month. Unfortunately, any debate on the near-term policy profile will have been superseded by Russia’s invasion of Ukraine, which has left the euro area outlook extremely difficult to forecast.

Data-wise, after yesterday’s further leap in consumer price inflation, today brings euro area producer price figures. These seem bound to confirm a further inflationary impulse at the factory gate related not least to energy, with expectations for a rise of at least 1ppt to above 27%Y/Y. However, being figures for January, they are now out of date – the strong chances are that PPI inflation leapt much further last month. And given this week’s energy price shifts, PPI in March looks on track to go sky high.

Euro area unemployment figures for January are also due. Having declined for the eighth successive month in December to a series low of 7.0%, a further drop of 0.1ppt in the unemployment rate is possible at the start of the year even as the latest pandemic wave tempered jobs growth in the services sector. Of course, this figure would be significantly higher were government job support programmes still not in place, and broader labour market slack remains ample and continues to weigh on wage growth.

Among the national releases, German car sales and production numbers for February are perhaps most notable. And survey-wise, the final euro area services PMIs will likely confirm the upbeat flash release, which suggested a turnaround in fortunes in the sector – the headline PMI rose 4.7pts to 55.8, a three-month high – with looser restrictions enabling a particularly strong rise in consumer-facing services and tourism. As such, the composite PMI rose 3.5pts in February to 55.8, signalling the fastest pace of expansion since September.

UK services PMIs and BoE survey data due, with the latter to highlight firms’ high wage and price expectations for the coming year
Like in the euro area, the final UK services and composite PMI indices are due this morning. The preliminary report suggested a striking improvement in the services sector, with the activity index jumping 6.7pts to 60.8, the highest since June 2021. So, the composite PMI also rose 6pts to 60.2 in February, the highest since June, with the index trending so far in Q1 almost 1pts above the Q4 average. But despite some easing in supply constraints, price pressures remained elevated, with the composite input price PMI increasing 1.6pts to 81.8, just shy of November’s survey high. Also due to be published are the BoE’s Decision Maker Panel data for January, with that survey’s wage- and price-setting expectations indices having recently contributed significantly to the hawkishness of some MPC members.

Services ISM indices to rebound with US factory orders numbers also set to be brighter
Today’s US dataflow also includes a focus on the services sector with the February ISM services survey due. This is expected to post a firm rebound from softness at the start of the year, which was probably related to Covid-19. In addition, January factory orders numbers are expected to see a return to growth following a dip the prior month – Daiwa America’s Mike Moran forecasts a rise of 1.8%M/M with nondurable orders likely to mirror the decent performance already reported for durable goods. Other US data due today include revised nonfarm productivity figures for Q4, Challenger job cuts for February, and the usual weekly jobless claims data.

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