Japanese capital spending in Q1 firmer than expected to suggest a modest upwards revision to Q1 GDP growth
The financial statements statistics of Japan’s corporations suggested that firms’ capital spending was stronger than initially estimated in Q1. Indeed, today’s MoF survey suggested that nominal fixed investment jumped 2.7%Q/Q, with the strongest growth in manufacturing capex (4.3%Q/Q) in three quarters, while non-manufacturing investment rose for the fourth consecutive quarter (1.9%Q/Q). This left capex up 11%Y/Y, the strongest annual increase since Q218. Moreover, the quarterly increase compares favourably to the initial estimate assumed in the preliminary national accounts release, which reported nominal fixed investment growth of 1.0%Q/Q. As such, when updated national accounts figures are published a week today, we would expect an upwards revision to fixed investment growth in Q1. Indeed, our colleagues in Tokyo forecast a modest upwards revision to GDP growth of 0.1ppt to 0.5%Q/Q (1.9%Q/Q annualised).

Among the survey’s other detail, sales rose for the sixth consecutive quarter (0.5%Q/Q), underpinned by solid growth in the non-manufacturing sector. As such, total profits rose for the first quarter in three, by 6.2%Q/Q, to leave them up 4.3%Y/Y. This reflected a solid recovery in non-manufacturing (17.2%Y/Y), with double-digit growth in construction, information & communications. But despite an increase on the quarter, manufacturers’ profits were still well down on a year earlier (-15.7%Y/Y), with steep declines in the petroleum, chemicals, and ICT equipment subsectors partially offset by accelerated growth in general machinery and autos subsectors.

Today’s final Japanese manufacturing PMIs confirmed that the survey’s output component rose above the key-50 expansion level in May for the first month in eleven. Indeed, despite being revised down from the preliminary release, the output index still increased 3pts on the month to 50.9, with the new orders component (50.5) signalling modestly positive growth for the first time since last June too, despite an ongoing retrenchment in export orders. The improvement in supply bottlenecks, as well as lower energy and commodity prices saw the input price PMI fall a further 4pts to 60.7, the lowest in more than two years, albeit still above the long-run average. Meanwhile, the output price index fell more than 2pts to a three-month low of 57.2, albeit still roughly 9pts above the long-run average.

German retail sales tick up only modestly in April as consumers try to economise in the face of high inflation
While German household confidence has picked up steadily over the past six months, rising to a 13-month high in May, consumers remain reluctant to spend. Admittedly, having dropped steadily for four successive quarters, German retail sales volumes ticked up at the start of Q2. However, the rise of 0.8%M/M followed a revised fall of 1.3%M/M, and merely left the level unchanged from the Q1 average. And sales volumes were still more than ½% below the pre-pandemic level in February 2020 and down a hefty 8.6%Y/Y. As consumers tried to economise in the face of record food inflation, the volume of sales of such items was down 9.7%Y/Y while non-food sales were down a slightly smaller 8.1%Y/Y. In nominal terms, however, the total value of sales was down just 0.8%Y/Y, with food sales up 3.0%Y/Y but non-food sales down 3.3%Y/Y.

Euro area inflation to take a big step down but drop in core rate likely modest
The national data released over the past two days suggest that today’s flash euro area inflation estimates will report a drop in the headline rate of at least 0.9ppt to 6.1%Y/Y, a fifteen-month low. The decline will be led by a further fall in energy and food inflation. Non-energy industrial goods and services inflation will also have moderated somewhat too, the latter thanks not least to lower public transport prices, including the new €49 per month "Deutschlandticket". But overall, the decline in core inflation will be far more marginal than the drop in the headline rate, perhaps just 0.2ppt to 5.4%Y/Y, and certainly not sufficient to persuade the ECB not to raise rates again this month.

Euro area unemployment data, final PMIs and ECB meeting account also due
April figures for the euro area unemployment rate are also due today; we expect it to remain unchanged at the series low of 6.5%. The final manufacturing PMIs – the flash estimates of which were consistent with contraction in the sector – are also due. In addition, lunchtime will bring the publication of the ECB’s account of the 4 May monetary policy meeting, when the Governing Council slowed the pace of rate hikes to 25bps but also signalled a likely acceleration in the pace of Quantitative Tightening from July.

UK house prices broadly stable in May, while latest bank lending figures likely to flag negative impacts from ongoing tightening of financial conditions
A key focus in the UK today will be the BoE’s lending data for April, which will likely flag negative impacts from the ongoing tightening in financial conditions. While the number of mortgage approvals is likely to have risen again in April, net mortgage lending is expected to remain subdued, at around £0.6bn in April, compared with £4.1bn in April last year. Certainly, the impact of higher interest rates on the housing market was evident in this morning’s Nationwide report today – although the monthly decline was modest at 0.1%M/M, that nevertheless left sales down 3.4%Y/Y and around 4% below their August 2022 peak. And with numerous lenders withdrawing products in the wake of the recent big upside surprises to inflation and sharp jump in swap rates, the prospects of further monetary policy tightening over coming months will continue to weigh on the housing market.

This morning will also bring the final UK manufacturing PMI, with the flash PMIs suggesting that the sector is in retreat, with the output index down 0.9pt to 47.4 to be consistent with contraction for a third successive month.

US focus on manufacturing ISM, construction and labour data
The May US manufacturing ISM survey is expected to remain consistent with a lacklustre sector, with the headline index forecast to remain close to April’s 47.1 and the prices paid index to moderate further from 53.2 previously. April data for construction spending are also due along with final unit labour cost and productivity figures for Q1, the latest weekly claims figures, and – ahead of tomorrow’s payroll report – the ADP jobs data for May.