Inflation data in focus this week

Chris Scicluna

Japanese CPI inflation likely edged lower again in March but underlying inflation could well have edged up to a new 4-decade high; goods trade, IP, services activity and flash PMIs also due
While it was a quiet start to the week for economic data from Japan, this week brings a few notable releases, including the national CPI inflation report for March on Friday. Having reached a multi-decade high of 4.3%Y/Y in January, the headline CPI rate dropped 1.0ppt in February thanks not least to the impact of the government’s energy support policy. The preliminary data from Tokyo suggest that we’ll see a further, albeit slight, drop in the headline national CPI rate, of 0.1ppt to 3.2%Y/Y. This will in part reflect lower prices of fresh food, excluding which the BoJ’s forecast core measure is likely to be unchanged at 3.1%Y/Y. And it will reflect lower inflation of energy, reflecting an easing in both the electricity and gas components thanks not least to the government’s support measures. So, the core measure that excludes both energy and fresh food is expected to edge up another 0.1ppt to a new four-decade high of 3.6%Y/Y, in part reflecting higher inflation in services.

Other data due from Japan this week include the final February industrial production figures (Wednesday), March goods trade and February tertiary output (Thursday) and the flash April PMIs (Friday).

According to the preliminary IP data, production rebounded a stronger-than-expected 4.5%M/M in February after the drop of 5.3%M/M the prior month related in part to the impact of the Lunar New Year on export demand. Growth was driven by a rebound in the autos sector (15.4%M/M), as well as stronger production of semi-conductors, power units and electrical parts & devices.

The provisional goods trade data for the first twenty days of March reported continued firm growth in imports (13.0%Y/Y) but disappointingly soft export growth (just 1.1%Y/Y). According to China’s trade data, its imports from Japan remained weak in March, down 12.3%Y/Y to be down 19.5%YTD/Y. But Chinese exports were also softer, down 4.8%Y/Y to be down 2.4%YTD/Y.

Tertiary activity figures for February are expected to report ongoing recovery in the services sector. The tertiary activity index rose a greater than expected 0.9%M/M in January to be 2.6%Y/Y thanks not least to strong growth in transport, eating out and retail, related not least to the pickup in overseas visitors.

 The March PMIs suggested a strong rebound in the services sector thanks to the post-pandemic easing of restrictions. Indeed, at 55.0, the final services activity index marked a seventh successive increase to be the second-highest on the survey’s history. Firms in the travel and tourism in particular pointed to strong demand ahead. In contrast, the manufacturing PMIs pointed to ongoing contraction, albeit at the softest pace for five months, with cost pressures still high by historical standards but easing further.

UK inflation and labour market data to determine whether BoE will hike again next month
A busy week ahead for UK economic data brings updates on inflation (Wednesday), the labour market (tomorrow) and retail sales (Friday), as well as the April flash PMIs (also Friday), the first two of which are likely to determine one way or another whether the BoE will hike rates again next month.

CPI inflation in February surprised on the upside. However, the surprise largely reflected a record increase in food prices, as well as a likely associated rise in prices in eating out, and also higher clothing prices. The food component is hard to forecast with accuracy. But clothing prices should be better behaved in March. Indeed, we expect a softening of inflation of both non-energy industrial goods and core services to allow the core CPI rate to reverse the 0.4ppt rise to 6.2%Y/Y seen in February. Headline inflation also seems bound to fall thanks in part thanks to an energy-price base effect associated with the Russian invasion of Ukraine. So, overall, we expect the headline CPI inflation rate to fall back 0.7ppt to 9.7%Y/Y, which would be the lowest rate since June.

Over recent months, the labour market has been more stable than feared, as firms have hoarded labour despite weak economic activity, but employment growth has coincided with a welcome fall in inactivity. We expect the unemployment rate to remain unchanged for a fifth successive month at 3.7% in the three months to February. However, other data should be consistent with a loss of momentum in the labour market. While they are set to remain above the pre-pandemic norms, vacancies are likely to fall further from recent series highs. And having already slowed in January, a further cooling in private sector regular pay growth the three months to February – which surveys suggest is likely – would strengthen the hand of those MPC looking for an excuse to stop raising rates.

Among the other UK data, consistent with recent signals of firmer economic activity, retail sales surprised on the upside in both January and February. But with real incomes still squeezed, and the month having been the wettest March in decades, we expect payback for that strength in March. However, while we think sales dropped by up to 1.0%M/M (or even more) in March, it will take a decline of about 2.0%M/M to extend the number of consecutive quarterly declines in retail sales to seven in Q1.

Finally, the March PMIs suggested a slight loss of momentum at the end of Q1, with the services activity index down 0.6pt to 52.9 and the manufacturing output index down about 2pts to 49.0. As such, the composite output PMI dropped 0.9pt to 52.2, still nevertheless suggestive of expansion. We expect the April flash PMIs to suggest a similar pace of output growth at the start of Q2. However, not least as they exclude activity in the public sector, we caution that the PMIs have not provided a particularly reliable guide to GDP over recent months. Meanwhile, we will look for a moderation of inflation pressures to be signalled in the input and output price PMIs, with the respective composite indices likely to drop to two-year lows.

Euro area focus on April surveys and final March inflation, with outlook for ECB rates after May still unclear
While the ECB’s rate decision next month is still data-dependent, it will likely take a big upside surprise to core inflation in the flash April inflation figures for the Governing Council to hike by more than 25bps in May. And the outlook for rates thereafter is certainly still very unclear, with the extent of growth momentum likely to be one key factor. In that context, the main euro area data focus in the coming week will likely be the April economic survey results, which like the UK include the flash PMIs due on Friday. In March, the final euro area services activity PMI index rose 2.3pts to a 10-month high of 55.0, while the manufacturing output PMI rose 0.3pt to 50.4, suggestive of stagnation in the sector but also the best since May 2022. As such, the euro area composite output PMI rose 1.5pts to 53.7, a level consistent with moderate economic growth heading towards Q2. While, as in the UK, we expect little change to the output PMIs in April, we expect the price indices to suggest a moderation of input and output inflation pressures in manufacturing and – more importantly perhaps – services. Other April survey results due this week include the Commission’s flash estimate of consumer confidence on Thursday and the ZEW investor sentiment indices tomorrow.

Like last week’s German data, the final estimates of inflation for the euro area as a whole, due on Wednesday, are likely to align with the initial estimates, which reported a drop of 1.6ppts in the headline euro area HICP rate to a 13-month low of 6.9%Y/Y. But the decline was largely due to lower energy prices. And while core goods inflation moderated somewhat, increased pressures in services meant that core inflation (excluding all food and energy) edged up to a new series high of 5.7%Y/Y. As that was 5.65%Y/Y to two decimal places, however, we cannot exclude a downwards revision to the core rate in the final estimate.

US focus on the housing market with the Fed’s Beige Book and leading indicators also due
US housing market data due this week include March housing starts (Tuesday) and existing home sales (Thursday). Daiwa America’s Lawrence Werther expects both to fall back, respectively by 3.4%M/M and 1.8%M/M. In particular, with respect to housing starts, he expects single-family activity to remain soft, with elevated inventories of unsold new homes and sluggish demand likely to ensure that activity remains near the bottom of the recent range. And given the exceptional strength in the prior month, payback in multi-family starts seems likely too. Given current affordability strains related not least to higher mortgage rates, existing home sales are likely also to resume their downtrend following a big jump of 14.5%M/M in February. Among the other data due, the Conference Board’s leading indicator is likely to fall the twelfth successive month.

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