BoJ Tankan results flag contrasting business conditions for Japanese manufacturers and services
Today’s BoJ Tankan survey offered a comprehensive update on Japan’s business conditions and economic and inflation outlook, with the sentiment indices offering contrasting messages about conditions in the manufacturing and non-manufacturing sectors. Firms’ inflation expectations were nudged slightly higher, but businesses also assessed that costs burdens were starting to recede. Among the key findings:

- The headline DI for large manufacturers disappointed in Q1, dropping to its lowest since Q420 (down a steeper-than-expected 6pts to +1). The deterioration was widespread, with the respective DIs falling in 16 out of the 18 subsectors. But a further easing in supply bottlenecks in the autos sector saw the respective DI rise to its highest in five quarters, albeit still remaining in negative territory. Manufacturers forecast only a modest improvement in Q2 too (up 2pts to +3).

- In contrast, the headline DI for large non-manufacturers rose for the fourth consecutive quarter (up 1pt to +20) to be back to the pre-pandemic level in Q419 for the first time. The improvement was led by the retail sector (up 10pts to +18, a two-year high), which continued to benefit from the relaxation of pandemic restrictions and the return of overseas visitors. But despite an anticipated pickup in the hospitality sector in Q2, the headline non-manufacturing DI was forecast to fall back to +15.

- Despite the outlook and an anticipated decline in profits growth in FY23 amid high cost burdens, firms remained remarkably upbeat about their investment intentions for the year ahead. Overall, firms forecast capex growth of 4.4%Y/Y in FY23, which represents the strongest initial estimate in any March Tankan since the series began forty years ago, following the firmest growth on the survey measure in FY22 (11.4%Y/Y) since 1990.

- While still elevated today’s survey reported a modest easing in input cost burdens in Q1 for both manufacturers and non-manufacturers alike, and cost pressures were expected to moderate further this quarter too. And the respective output price indicators edged slightly lower too, suggesting that firms continue to absorb some of the extra costs. Nevertheless, firms revised up slightly their expectations for their own prices, expecting a cumulative increase of 4.6% over the coming five years (up from 4.3% previously), although large firms forecast a rise of just 3.5-3.6% over that period. Notably perhaps firms expect “general inflation” to be 2.8% this year (an upwards revision of 0.1ppt from the last Tankan survey), and expect it to be bang on the BoJ’s 2% target in five years’ time. The pickup in inflation expectations for this year largely reflected higher expectations of small firms, while large firms forecast inflation to fall back below target (to about 1½%) in three years’ time.

Overall, there was nothing in today’s Tankan results to compel the BoJ to change its policy stance at the Policy Board’s meeting at the end of the month, which will be the first to be held under incoming Governor Ueda’s leadership. The updated economic forecasts might well see Policy Board members’ expectations for inflation this year revised a touch higher, but they might be expected to maintain their collective view that inflation is likely to fall back somewhat below target in FY24. The latest Japanese wage figures for February, due on Friday, will nevertheless be of interest to the BoJ as it prepares its forecasts, with the BoJ consumption activity indices for the same month also to be published that day.

Caixin manufacturing PMIs disappoint highlighting underwhelming Chinese recovery in the sector
Like last week’s official Chinese PMIs for the sector, today’s Caixin manufacturing PMIs for March were weaker than in February. But they were also significantly softer than the official indices and also missed expectations, implying that activity in private and smaller manufacturers remains lacklustre. In particular, the headline Caixin manufacturing PMI dropped 1.6pts to 50.0 (vs a drop of 0.7pts to 51.9 in the official PMI). The detail of the Caixin survey reported a loss of momentum in output (down 2.7pts to 50.6) and new orders (down 2.3pts to 50.6), with new export orders slipping back into contraction territory where they had been from August to January. Like the official survey, the Caixin survey points to a continued absence of inflationary pressures. Indeed, the PMIs for input and output prices both slipped back to 50.0.

Euro area PPI and ECB consumer expectations survey to be of interest
This week will be somewhat quieter on the euro area economic data front. Following Friday’s consumer inflation release, February producer inflation figures and ECB consumer survey (tomorrow) will not be without interest, offering further insight into the disinflationary trend at the factory gate and inflation expectations respectively. Ahead of this brings the release of new car registrations data for March from France, Italy and Spain (today), which will be followed on Wednesday by German car registration and production figures. German goods trade (tomorrow), factory orders (Wednesday) and industrial production data for February (Thursday) will provide an update on manufacturing activity in the middle of Q1. In terms of business survey results, the final manufacturing and services PMIs will be published this and Wednesday respectively, followed by the construction PMIs on Thursday. The euro area flash PMIs unexpectedly suggested that economic conditions improved significantly at the end of the first quarter despite financial sector turbulence, although the survey implied.

UK final PMIs likely to confirm a slight loss of recovery momentum in March
Like in the euro area, the holiday-shortened week is set to be very quiet on the UK economic data front, kicking off this morning with the final March manufacturing PMIs, followed by the final service sector PMIs on Wednesday and construction PMIs on Thursday. The flash PMIs suggested that activity slowed on the month, although they were still consistent with expansion in the private sector. In particular, having surprisingly leapt 4.6pts in February to an eight-month high, the composite output PMI slipped back by 0.9pt to 52.2. That left the Q1 average at 51.3, the first quarterly reading above 50 since Q222. Wednesday will also bring new car registrations figures for March. In terms of BoE speak, Chief Economist Pill and external MPC member (and uber-dove) Tenreyro will talk publicly at separate events tomorrow.

Labour market report the US highlight with payroll growth expected to moderate somewhat
In contrast to Europe, it’s set to be a busy week for US economic data, culminating in the March labour market report on Friday. Noting the continued low levels of initial jobless claims but also the likelihood of increased caution in hiring, Daiwa America’s Lawrence Werther forecasts nonfarm payrolls to rise 250k, somewhat below the average of 336k in the prior six months and 311k in February but respectable nonetheless. He also expects the unemployment rate to remain unchanged at 3.6% as further improvements in labour force participation offset growth in employment. And having shown hints of easing in recent months, the average hourly earnings data will be closely watched. Ahead of the release of the labour market report, the week in the US kicks off with the March manufacturing ISM survey and February construction output data (today), followed by February final factory orders and job openings (tomorrow), and the March services ISM survey and February final trade data (Wednesday).