UK CPI inflation again beat expectations with headline and core CPI at fresh 30-year highs
UK inflation once again exceeded expectations, with the headline CPI rate rising a hefty 0.8ppt in March to 7.0%Y/Y, a new 30-year high. The biggest contribution to the rise in inflation inevitably came from energy prices, as petrol inflation accelerated more than 10ppts to 33.1%Y/Y. But pressures were again broad-based, with inflation of food and non-alcoholic beverages up 0.8ppt to 5.9%Y/Y, the highest in more than a decade. Services inflation was also significantly stronger, up 0.5ppt to a nine-year high of 4.0%Y/Y, with the hospitality component up 1.9ppts to 6.9%Y/Y and transport services up 0.8ppt to 4.8%Y/Y on increased train fares. Moreover, inflation of non-energy industrial goods also rose 0.5ppt, to a new series high of 7.9%Y/Y, with clothes and footwear prices up almost 10%Y/Y and a prices of furniture and other household items up a little more than 10%Y/Y, as retailers continued to pass on cost pressures to consumers. So, core inflation rose 0.5ppt to 5.7%Y/Y, also a 30-year high.

Looking ahead, with the household energy price cap rising more than 50% in April, and pipeline pressures continuing to mount (input producer price inflation rose 4.1ppts to 19.2%Y/Y in March with the output PPI rate up almost 2ppts to 11.9%Y/Y), UK inflation now looks set to rise firmly above 8½%Y/Y next month. And with real disposable incomes falling sharply, and the economy highly dependent on consumer spending, the probability of a UK recession over the coming two quarters continues to rise.

Japanese machine orders plunge in February...
Today’s Japanese data were mixed. Certainly, February’s private sector machinery orders – a useful guide to private sector capex three months ahead – were disappointing, with domestic pandemic restrictions and supply chain disruptions seemingly taking their toll. In particular, core orders declined a much-steeper-than-expected 9.8%M/M after a drop of 2.0%M/M in January. While this left orders up more than 4% compared with a year earlier, they were trending so far in Q1 a little more than 4% lower than the Q4 average, implying weakness in non-residential investment ahead.

Within the detail, the weakness in February was principally driven by the non-manufacturing sector (-14.4%M/M) with steep declines in orders placed by transportation, finance and information services. Despite a rebound in orders placed by electrical machinery and auto producers, overall manufacturing orders slipped back (-1.8%M/M) for the second successive month. Meanwhile, public sector orders were also down for the third month out of the past four to the lowest since July 2020 and averaged in the first two months of Q1 a whopping 18% lower than in Q4. And overseas orders also slipped to a five-month low in February, even ahead of the deterioration in the global economic outlook as Russia invaded Ukraine and the latest pandemic wave swept across China. 

…but Reuters Tankan signals improving business conditions at the start of Q2
Despite the deteriorating external outlook, today’s Reuters Tankan survey suggested that Japanese firms were on the whole more upbeat about conditions at the start of Q2. Certainly, the services sector mood appears to have been boosted by the lifting of restrictions towards the end of March, with the headline non-manufacturing diffusion index (DI) up 9pts – the biggest monthly increase since December 2020 – to +8 in April, with a notable improvement in conditions the retail and wholesale sectors. There was also a further modest improvement in the headline manufacturing DI, up 3pts to +11, admittedly still half the level seen in December. Indeed, firms in the autos and electrical machinery sectors – which continue to be more adversely impacted by supply bottlenecks – reported a marked deterioration in conditions in April, with the respective DIs at the weakest since 2020.

China’s trades surplus narrows despite first drop in imports since 2020
At face value, today’s Chinese trade data suggested a stronger export performance in March, with the trade surplus rising $16.8bn on the month to $47.4bn. But February’s data were impacted by the timing of the Lunar New Year and so the surplus in March was still some $10bn lower than the average of the first two months of the year and half the record high ($97bn) logged at the end of last year. Indeed, export growth in March (14.7%Y/Y) was softer than the January-February average (15.2%Y/Y). Moreover, the surplus was flattered by the first decline in imports (-0.1%Y/Y) since August 2020, as the latest pandemic wave and localised lockdowns weighed on demand. Moreover, with the Shanghai lockdown having only come into effect in the middle of last month, and global uncertainty having increased amid the persisting Ukraine war, Chinese trade looks set to weaken further over the near term.

BoF revises down its estimate for French GDP growth in Q1 to just ¼%Q/Q amid rising economic uncertainty
The Bank of France’s business survey for March suggested that, despite the impact of the Ukraine conflict, activity in the industry and construction sectors fell only slightly last month. And this was largely offset by the continued improvement in services, particularly in hospitality and recreation following the lifting of restrictions. Nevertheless, the BoF revised down its estimate for Q1 GDP growth by ½ppt to ¼%Q/Q. And while it suggested that the business outlook for April remained relatively positive, the outlook for manufacturers and construction firms in particular looks more questionable. Certainly, the latest survey flagged a marked increase in supply challenges over the past month relating to both the Ukraine war and renewed Covid restrictions in China, with 60% of manufacturers – the highest share since the question was first asked in May 2021 – and almost 90% of auto producers, assessing supply bottlenecks as a limiting factor on production.

Looking ahead, today will bring Italian IP numbers for February, which are expected to report growth of 1.0%M/M, although this would merely reverse only part of the 3.4%M/M decline in January. ISTAT will also publish its latest monthly economic update.

US PPI inflation numbers due today
After yesterday’s US inflation numbers saw consumer prices rise at the fastest monthly pace since 2005 (1.2%M/M) to leave the annual rate at 8.5%Y/Y, but the increase in core prices (0.3%M/M) was less than expected, focus today turns to PPI inflation numbers. Prices of wholesale energy products likely jumped again in March (average monthly increase of 2.5% in the past 12 months), and food prices are likely to remain under pressure (up 1.1% on average since February 2021). Higher input prices and supply disruptions are likely to sustain pressure on prices of goods excluding food and energy (up 0.8% per month in the past year), and increases in services prices have been brisk as well (average increase of 0.6% per month in the past year).