LDP wins clear majority in Japan’s Upper House election, bolstering Kishida’s authority
PM Kishida comfortably achieved his objective in Sunday’s Upper House election, and hence bolstered his authority, as his ruling LDP party increased its majority of the seats in the chamber. In particular, the LDP and its coalition partner Komeito won 76 of the 125 contested seats, well above the 56 required to retain their majority and the 69 seats required to increase their representation in the House of Councillors. That took their total number of seats in the chamber to 146 out of the 248. The result suggests that a two-thirds majority in favour of constitutional revision, to provide a legal basis for Japan’s self-defence forces, exists in both chambers if Kishida wants to press ahead in that direction. In terms of economic policy, meanwhile, Kishida might now feel confident reaffirming his support for the BoJ’s monetary policy framework while also extending measures in place to contain increases in prices of fuel and perhaps food too.

Japanese machine orders fell, but still point to solid capex growth; BoJ revised up its economic assessment for 7 out of 9 regions but warns of high economic uncertainty
The latest Japanese machine orders data – that often provide a useful guide to private sector capex – broadly aligned with expectations. In particular, private core orders fell 5.6%M/M in May, with orders placed by manufacturers down almost 10%M/M and those by non-manufacturers down more than 4%M/M. But orders numbers are notoriously volatile and the decline in May came on the back of surprisingly sizeable increases in the previous two months. As such, orders were still trending more than 8½% higher in the first two months of Q2 than the Q1 average, suggesting solid investment growth over the coming quarter.

This positive news tallied with the findings of the BoJ’s latest quarterly Regional Economic Report, that suggested that business investment had been picking up moderately or increasing in eight out of Japan’s nine regions. Unsurprisingly, private consumption was assessed to have picked up in all nine regions as pandemic restrictions eased. Overall, seven out of the nine regions revised up their economic assessments over the past three months, while the other two cited an intensification of supply-side constraints. But, BoJ Governor Kuroda again warned of ‘very high uncertainty’ regarding the economic outlook, and (for now at least) reiterated that the BoJ would not hesitate to take additional easing steps if required.

Looking ahead, the Reuters Tankan survey (Wednesday) will provide a more timely update on business conditions at the start of the third quarter. Meanwhile, revised IP numbers for May (Thursday) will also be watched for any upwards revision to the steep decline record in the preliminary estimate (-7.2%M/M). And tertiary activity numbers for May will be published on Friday and likely to report another month of solid growth as the normalisation in the services sector since the lifting of restrictions continued. In terms of inflation, tomorrow’s PPI numbers for June will be watched.

Chinese inflation beat expectations, but remains subdued; GDP expected to have contracted on the quarter in Q2 to leave annual rate very subdued
The weekend’s Chinese inflation data came in marginally above expectations but were nevertheless largely subdued, consistent with an economy with ample slack. Consumer price inflation rose 0.4ppt in June to 2.5%Y/Y, the highest in almost two years. But the source of the upwards pressure was largely food (up 0.6ppt to 2.9%Y/Y, in part due to higher pork inflation) and fuel (inflation of transportation and communications rose 1.7ppts to 8.5%Y/Y, the highest since 1994). In contrast, core CPI inflation edged up just 0.1ppt to a three-month high of just 1.0%Y/Y. Meanwhile, PPI inflation fell back 0.3ppt to 6.1%Y/Y, with producer prices unchanged on the month.

Looking forward to the remainder of the week, Wednesday will bring the latest Chinese trade report for June. With Covid restrictions having been relaxed, we would expect to see an improvement in overseas shipments and domestic demand. But all eyes on Friday will be on the first estimate of Q2 Chinese GDP, along with the monthly activity indicators for June. Given the Covid shutdowns, GDP is forecast to have contracted on the quarter for just the second time since the series started in 2011. Indeed, the Bloomberg forecast is for a drop of 2.3%Q/Q, which would leave the annual rate slowing to just 1.0%Y/Y from 4.8%Y/Y in Q1.

Euro area IP to remain subdued; final June inflation estimates from member states due
After a quiet start for euro area economic releases, there are only a handful of noteworthy releases this week. Euro area industrial production figures for May will come on Wednesday, which we expect to report growth close to ½%M/M. Meanwhile, euro area goods trade data for May (Friday) are expected to mirror the notable deterioration in the trade balance recorded in Germany that month. At the country level, the latest German ZEW investor sentiment survey for July and Bank of France economic update for June will be published tomorrow. The final release of German, French and Spanish inflation data for June (Wednesday) and Italian numbers (Friday) are also due. Reflecting temporary policy measures, the preliminary estimate of the German HICP inflation rate fell back a bigger-than-expected 0.5ppt to 8.2%Y/Y. But this contrasted with the upwards shifts in the other major member states, with the French HICP rate up 0.7ppt to 6.5%Y/Y, Italian inflation up 1.2ppts to 8.5%Y/Y, and Spanish inflation jumping 1.5ppts to 10.0%Y/Y.

UK politics a key focus; GDP expected to have remained very weak in May
The focus in the UK this week will remain firmly on politics, with the precise details of the Conservative party’s process for determining the identity of Boris Johnson’s successor as leader and Prime Minister set to be laid out later today. The race still looks far too close to call. Former Chancellor Sunak is bookies' favourite in a crowded field, but only because he seems bound to make it to the last two. But in the run-off he'll face a challenge from the right (Truss or Mordaunt perhaps, or even Shapps), and could well be defeated there. It’s worth remembering that Tory party leadership contests often throw up a surprise and there are no doubt several twists to come in this one.

There are also some notable economic data releases too, including the estimates of monthly GDP, production, services and trade data for May (Wednesday). Having failed to grow in the previous three months, GDP is likely to have remained subdued as household budgets continue to be squeezed by higher prices. Certainly, retail sales were particularly weak in May, although services activity might well have received a boost from increased tourism. But manufacturing and trade might well remain hampered by ongoing supply challenges.

Separately, BoE Governor Bailey will appear this afternoon before the Treasury Select Committee to answer questions on the Bank’s latest Financial Stability Report, while he will also give a speech tomorrow on how the impact of Covid-19 and the influence of longer-term structural forces will affect the economic landscape and policy-making in the years to come.

US consumer prices set to have risen further in June, with energy, food and core components likely to be higher
It will be a busy week for top-tier US releases, with Wednesday’s CPI inflation report the highlight. With energy prices having jumped again in June and food prices maintaining a steady upwards trend too, our colleagues at Daiwa America expect consumer prices to have risen 0.9%M/M in June, admittedly a touch below the Bloomberg survey consensus (1.1%M/M). This would leave the annual rate of headline inflation unchanged at 8.6%Y/Y. But continued pressure from rents, travel-related expenses, and costs of medical care services suggests another rapid increase in the core component too – Daiwa America forecast a slightly below-consensus increase of 0.5%M/M, to leave core inflation down 0.3ppt to 5.7%Y/Y. Likewise, PPI inflation (Thursday) is likely to have been boosted by energy. Friday will also bring the latest retail sales figures – expected to post a solid increase in June, boosted not least by higher prices – as well as June industrial production data – expected to report no growth last month following a drop in manufacturing output in May. And the preliminary University of Michigan consumer confidence survey (Friday) will be closely watched not least for the inflation expectations components, while the headline confidence index is likely to have remained close to June’s record low.