Comfortable victory for Macron

Chris Scicluna
Emily Nicol

BoJ to leave policy unchanged despite upwards revision to inflation forecast
The most notable event of the week in Japan will be the conclusion of the BoJ’s latest policy meeting on Thursday. With Kuroda having determinedly defended the 0.25% 10Y yield cap over recent weeks, there certainly seems no reason to expect a change of tack on policy this week. This decision to leave the policy rate unchanged in negative territory and the yield curve control parameters similarly intact will be justified by the BoJ’s updated outlook report. While reports last week suggested that the Board’s forecast for core inflation (excluding fresh food) for this fiscal year will likely be nudged up to between 1.5-1.9%Y/Y from 1.1%Y/Y in the January report, that will reflect the temporary impact of higher oil prices and the weak yen. And the inflation outlook for the next fiscal year (previously also 1.1%Y/Y) will remain firmly sub-target. However, in his press conference, Kuroda’s thoughts about possible amendments to the policy framework are likely to be probed, as will his views about the weak yen, which is currently around ¥128.5/$, some 7% lower than when the BoJ last met and more than 10% lower over the past two months.

This week will be a busy one for Japanese data releases. Admittedly it started on a relatively quiet note, with just the services PPI figures reporting the headline rate rising 0.2ppt to 1.3%Y/Y, a ten-month high amid a jump in transportation services costs on the back of higher energy costs and supply disruptions – indeed, ocean freight transportation inflation jumped 7.2ppt to 43.9%Y/Y. Likely of more interest will be the BoJ’s estimates of underlying inflation (due tomorrow), which should show a further upwards tick in the trimmed mean CPI rate from 0.9%Y/Y in February, albeit remaining considerably lower than equivalent measures in the US (5.9%Y/Y) and euro area (5.1%Y/Y). Tomorrow will also bring the latest labour market numbers for March, which are expected to report that the unemployment rate moved sideways at 2.7%, with only a modest increase expected in the job-to-applicant ratio. The latest retail sales and IP numbers (Thursday) are however likely to report a more noticeable improvement as activity benefited from the relaxation of pandemic-related restrictions. Certainly, today’s department store sales reported a notable jump on the month, by a non-seasonally adjusted 34%M/M. This left sales up 4.5%Y/Y, but nevertheless down more than 20%Q/Q, supporting our view that household consumption was a drag on GDP growth in Q1.

German ifo survey due shortly; Q1 GDP and April inflation the highlights at the end of the week
It is set to be a busy week ahead for top-tier euro area releases, concluding on Friday with the flash Q1 GDP and April inflation estimates. Activity in the euro area will have been given a boost by the lifting of Covid-related restrictions and reopening of the services sector. But the recovery will have been curbed to some extent by the Russian invasion in Ukraine in late February, with the subsequent worsening of supply constraints and higher cost burdens likely to have weighed on spending by businesses and households alike. So, we expect only a moderate increase in aggregate euro area GDP in Q1, by 0.2%Q/Q, in line with the ECB’s March baseline projection. Admittedly, we would expect significant differences in performance among the larger member states, with Germany set to have been more adversely impacted by supply-chain disruptions and hence more susceptible to contraction in the first quarter. We expect only modest growth in France (0.3%Q/Q) and Italy (0.1%Q/Q), with Spain (0.7%Q/Q) benefitting somewhat more from a recovery in tourism.

Meanwhile, the flash consumer price estimates for April should suggest that inflation has – at least for the time being – passed its peak, led by a drop in energy inflation due not least to lower prices of gasoline at the pump. So, despite further upwards pressures from services and food price inflation, we expect the headline CPI rate to ease by 0.4ppt to 7.1%Y/Y. However, we forecast core inflation to rise further, by 0.3ppt to a new record high of 3.3%Y/Y. Preliminary inflation figures from Germany and Spain will be published on Thursday, with the equivalent numbers from France and Italy on Friday.

There will be plenty of April sentiment surveys published in the coming week too, with the Commission’s consumer and business surveys – arguably the best guide to euro area economic activity – to give an update on conditions at the start of Q4 on Thursday. But the dataflow starts this morning with Germany’s ifo business survey results, which are likely to tally with Friday’s flash German PMIs, which saw the composite activity index drop to a three-month low due principally to a first drop in manufacturing output since June 2020. Euro area construction output figures for February are also due today – we already know that German output in the sector fell 0.7%M/M but French construction output rose 2.8%M/M after very strong growth of 7.8%M/M in January.

UK surveys to give insights into April retail sales and industrial activity
After Friday’s flash PMIs suggested ongoing, albeit moderating growth at the start of Q2, the flow of UK economic sentiment indicators continues this week, kicking off today with the CBI’s industrial trends survey for April, which will be followed by the CBI’s sister distributional trade report on Wednesday. The industrial survey will provide insights into the impact of the Ukraine conflict on manufacturers, who are likely to flag increasingly binding supply constraints and higher cost burdens. After Friday’s disappointing March retail sales numbers, the CBI’s distributive trades survey is expected to point to a further fall in retail sales this month, as the cost-of-living crisis was worsened by the big jump in household energy bills, rising inflation of other goods and services, and the increase in national insurance contributions. Meanwhile, tomorrow, we will get the public finance figures for March, the final month of FY21-22. Public sector net borrowing excluding banks came in at £13.1bn in February, taking the total in the first eleven months of the financial year to £138.4bn, less than half the amount in the equivalent period a year earlier. And last month, the OBR revised down its forecast of net public sector borrowing in FY21-22 by £55bn to £128bn (5.4% of GDP) thanks in particular to strong growth in personal income and corporation tax revenues and despite significantly higher government debt interest costs due to the impact of high inflation on index-linked Gilts.

US GDP growth set to have slowed significantly in Q1
It will be a busy week for US releases, with perhaps most noteworthy the first estimate of Q1 GDP on Thursday. Despite modest growth in consumer spending, construction and business investment in the first quarter, net exports are expected to have been a substantive drag, while there will be some payback for the significant positive contribution from inventories (5.3ppts) in Q4. Daiwa America’s research team forecasts annualised growth of 0.7%Q/Q, a touch softer than the Bloomberg consensus (1.0%Q/Q ann.) and a sharp slowdown from growth of 6.9%Q/Q ann. in Q4. Ahead of this, the week will bring the flash durable goods orders (today) and advance goods trade numbers (Wednesday) for March – a rebound in commercial aircraft bookings could boost total orders in March, but order flows in other key industries have levelled off recently, while exports are expected to have maintained a broadly sideways trend. Meanwhile, Friday brings the latest employment cost index (arguably the most reliable guide to wage pressures) for Q1 as well as the latest monthly personal income, consumption and deflators for March. The quarterly ECI index is expected to have risen by a solid 1.0%Q/Q in Q1 – the third consecutive reading of 1% or more – as pay packages were increased to attract new workers and compensate for higher inflation. But despite expectations of only a modest increase in wages in March, and a decline in new vehicle sales, household spending is expected to have maintained an upwards trend at the end of the first quarter.

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