BoJ consumption activity improved in March

Chris Scicluna
Emily Nicol

Chinese stocks rally as Covid cases fall; Topix lower as Toyota flags cost pressures
Following yesterday’s better showing on Wall St. (the S&P500 closed up ¼% but the NASDAQ rose about 1%), Asian stock markets were somewhat mixed today with China the standout. Despite an upside surprise in the latest Chinese inflation data, the CSI300 closed almost 1.5% higher after Shanghai reported a further big drop in new coronavirus infections and zero cases in the community – a key step towards easing pandemic restrictions. Hong Kong has rallied too, particularly in tech. But Japan’s Topix closed down 0.6% weighed by Toyota, which forecast a lower profit outlook as rising costs offset the boost from the weak yen. Benchmark indices in Korea and Taiwan were also slightly lower. In contrast, US stock futures point to further gains today and European markets are opening higher.

USTs lock in past two days’ gains ahead of CPI report; euro govvies little changed as ECB comments again validate rate expectations
Having rallied over the past couple of days, USTs are a touch firmer this morning, with the 10Y yield some 4bps lower back to yesterday’s low of 2.95% ahead of today’s all-important US CPI report. Inflation break-evens on TIPS continue to edge lower too. Euro area govvies are little changed as ECB Executive Board member Frank Elderson further validated market expectations of rate lift-off in July and downplayed recession fears, notwithstanding reiterating that the policy decisions would be data-dependent. In the Asia-Pacific, yesterday’s rally in USTs followed through to ACGBs, pushing the 10Y yield down 6bps to 3.50%

BoJ consumption activity improved in March, but suggests households were a drag on Q1 GDP
Like yesterday’s household spending numbers, the BoJ’s consumption activity index – arguably the most reliable guide to consumption in the national accounts – improved at the end of Q1. Consumption activity rose for the first month in four in March, by 1.9%M/M, as the lifting of pandemic restrictions gave a boost to spending on services (2.9%M/M) and durable goods (4.7%M/M). But this still left consumption more than 5% below the pre-pandemic level in February 2020 (with a larger shortfall in services of 13½%) and more than 11% below the September 2019 peak ahead of the sales tax hike (with a larger shortfall in spending on durable goods of 25% against this benchmark). Over the first quarter as a whole, the BoJ’s measure of consumption activity fell 3.4%Q/Q, reinforcing expectations that GDP contracted in Q1.

Chinese headline inflation boosted by food and energy, core CPI and PPI inflation eased
China’s headline CPI and PPI inflation rates came in a touch firmer than expected in April, with signs of some modest upwards price pressures associated with the impact of the Ukraine war. But underlying inflation remains very subdued suggesting scope for additional policy support. Headline CPI rose 0.6ppt to 2.1%Y/Y, a five-month high but still low by international comparisons. Food inflation jumped 3.4ppts to 1.9%Y/Y, an eighteen-month high. Non-food inflation moved sideways at 2.2%Y/Y, as Covid lockdowns took their toll on recreation prices. Indeed, core CPI inflation fell 0.2ppt to just 0.9%Y/Y, a ten-month low. And while it fell by less than expected, headline PPI inflation eased 0.3ppt to 8.0%Y/Y, a twelve-month low and some 5½ppts below October’s peak.

BoF survey points to only modest French GDP growth in Q2
The Bank of France’s latest monthly economic update signalled a relatively subdued start to the second quarter, with the impact of the Ukraine conflict and China lockdowns continuing to exacerbate supply bottlenecks and weigh on manufacturing and construction. Around 65% of manufacturers and more than half of construction firms suggested that supply difficulties had limited output last month. In contrast, reflecting the ongoing normalisation following the latest pandemic wave and return of overseas visitors, services activity continued to improve. But after the French economy disappointed expectations and failed to grow in Q1, the BoF’s survey pointed to only modest improvement in April and May, with its updated forecast suggesting GDP growth of just 0.2%Q/Q in Q2.

No surprises from final German April inflation data
There were no surprises from today’s final German consumer price inflation figures, with the headline rates aligning with the flash estimates. So, the EU-harmonised HICP rate was confirmed at 6.8%Y/Y in April, up 0.2ppt from March, with the national CPI measure up 0.1ppt to 7.4%Y/Y, a post-re-unification high. Within the updated detail, food price inflation stood out in April, up more than 2ppts to 8.6%Y/Y. Despite easing from March as heating oil prices fell some 20%M/M, energy inflation was still a lofty 35.3%Y/Y. When excluding food and energy, core inflation rose 0.4ppt to 3.8%Y/Y suggesting a broadening of underlying pressures.

US CPI inflation set to ease slightly from March’s 40-year high
All eyes today will be on the US CPI inflation report for April. Despite still-rising food prices, given an easing in energy price pressures, Daiwa America’s research team expects overall consumer prices to have increased just 0.2%M/M (down sharply from 1.2%M/M in March). This would leave the headline annual CPI rate down 0.4ppt on the month, albeit at a still-hefty 8.1%Y/Y. With prices of used cars and hotel stays also likely to have peaked, our US team expects core prices to rise by (sub-consensus) 0.3%M/M for a second month, which would similarly push the respective annual rate lower by around ½ppt from 6.5%Y/Y previously.

ECB policy makers in action
Plenty of ECB Governing Council members in action today, including President Lagarde at a Slovenian central bank event, while Executive Board member Schnabel will speak at Austria’s central bank. Bundesbank President Nagel is also expected to give a speech on ‘preparing for rising rates’.


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