Japan’s core machinery orders data exceeded expectations

14 September 2022

Chris Scicluna
, 
Emily Nicol

UK inflation drops below 10%Y/Y on lower petrol prices but core rate up again
In line with our forecast, UK inflation eased back slightly in August, dropping 0.2ppt to 9.9%Y/Y. The principal cause of the decline was auto fuel, prices of which fell almost 7%M/M to push the respective annual rate down more than 11ppts to just over 32%Y/Y. That, however, was partly offset by a further rise in food inflation of 0.6ppt to a new high of 13.4%Y/Y. Meanwhile, higher prices of clothing back in line with the pre-Covid pattern were broadly offset by a decline in second-hand car inflation, so that non-energy industrial goods price inflation was unchanged at 6.6%Y/Y, some 1.4ppts below the peak in the spring. (Indeed, further up the price pipeline, PPI inflation slowed in August with the input measure down more than 2ppts to 20.5%Y/Y, and output measure down 1ppt to 16.1%Y/Y.) But higher inflation of consumer-facing services – not least restaurants, where wage and other cost pressures are particularly acute, and package holidays – pushed services inflation up a further 0.2ppt to a new high of 5.9%Y/Y. So, core inflation rose 0.1ppt to 6.3%Y/Y.

We currently expect inflation to rebound back above 10.0%Y/Y in September and to peak above 10½%Y/Y in October due to higher prices of electricity and gas, before falling back below 10%Y/Y in Q1 and steadily further over subsequent quarters next year. But while today’s data were consistent with the BoE’s forecast published last month, its projected peak of 13.1%Y/Y next quarter is now obsolete given the government’s commitment to cap the rise in household energy bills next month well below the level previously imposed by the regulator Ofgem. At the same time, the positive impact on demand of the government’s energy market interventions, as well as yesterday’s evidence of increased labour market tightness and associated wage pressures, might lead the MPC to take a somewhat dimmer view of the medium-term inflation outlook.

Japan’s machine orders beat expectations in July due to demand from non-manufacturers
Today’s Japanese machinery orders data offered some encouragement with respect to the near-term capex outlook despite subdued business sentiment. Indeed, core orders – which provide a guide to private sector non-residential investment three months ahead – came in well ahead of expectations in July, jumping 5.3%M/M to leave them trending roughly 3% higher than the Q2 average and at their highest level since June 2019. The bounce was underpinned by a rebound from the non-manufacturing sector, where core orders placed by firms surged 15.1%M/M with a sizeable (and likely one-off) increase in the transportation and postal sub-sector (173%M/M). In contrast, orders placed by manufacturers fell 5.4%M/M to their lowest level since February. Government orders were also notably weaker, down 18.4%M/M to a two-year low and trending around 25% below the Q2 average. And orders from overseas also maintained the recent downtrend (-2.4%M/M) to be more than 6% lower than the Q2 level.

Euro area IP set to have contracted at the start of Q3
The euro area data focus today will be the release of industrial production figures for July. Notwithstanding the surprise uptick in Italian IP, data published from other member states have been more consistent with the deterioration in manufacturing sentiment and point to a decline in the euro area aggregate measure. Indeed, based on figures published so far, euro area IP is likely to have fallen by around 1%M/M in July, which would still leave it up a little more than ½%Y/Y and almost 2% above the pre-pandemic level. Separately, ECB Chief Economist Lane is due to give opening remarks at a money-market group meeting, while the Commission is reportedly due to publish its energy market intervention plan.

US PPI inflation to be watched for signs of persistent pipeline price pressures despite easing supply constraints
Following yesterday’s upside surprise to US CPI, today’s PPI inflation numbers will be watched for further signs of persistent pressure further up the supply chain. Producer energy prices are expected to have fallen again in August on lower fuel prices, and an easing in supply-side constraints might also limit the upwards trend in price of core items too. Our colleagues in Daiwa America expect final demand prices to drop 0.2%M/M, but core prices (ex food and energy) to rise 0.3%M/M.

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