Inflation features in the coming week

Emily Nicol

China’s Q2 GDP fell short of expectations to suggest a slowing recovery momentum, with softer domestic and overseas demand playing a role
Today’s Chinese GDP figures fell short of expectations in Q2, providing further evidence that the post-lockdown recovery is losing momentum. Admittedly, GDP growth accelerated to 6.3%Y/Y from 4.5%Y/Y in Q1, the strongest growth for two years. But this was flattered by base effects associated with last year's lockdowns. Indeed, the quarterly growth slowed from 2.2%Q/Q to just 0.8%Q/Q, just half the average pace in the five years before the pandemic. Within the monthly activity figures, retail sales growth slowed sharply in June (3.1%Y/Y), to leave year-to-date growth down more than 1ppt to 8.2%YTD/Y, to suggest that private consumption is sagging amid subdued confidence. Spending on eating out remained relatively strong, although growth (16.1%Y/Y) more than halved compared with May, while spending on consumer goods slowed sharply (down almost 9ppts to 1.7%Y/Y). Meanwhile, industrial production growth increased 0.9ppt to 4.4%Y/Y, although this was flattered by a decline in output a year ago. And the sharp decline in exports in June (-12.4%Y/Y) will further raise concerns about the near-term production outlook. Urban fixed investment slowed to 3.8%YTD/Y, the softest pace since end-2020, with private capex down 0.2%YTD/Y. And the pace of decline in property development investment accelerated by 0.7ppt to 7.9%YTD/Y. Finally, while the unemployment rate was unchanged at 5.2%, matching the lowest rate since the start of last year, the youth unemployment rate rose 0.5ppt to a new series high of 21.3%.

Japanese inflation figures in focus at the end of this week
When Japanese markets reopen after today’s national holiday, the key focus this week will be the release of consumer price inflation figures for June on Friday. Headline inflation is expected to have moved sideways at 3.2%Y/Y. But when excluding fresh foods, the BoJ’s forecast measure of core inflation is forecast to have ticked slightly higher, by 0.1ppt to 3.3%Y/Y, albeit this would still leave it 0.9ppt below January’s peak. Ahead of this brings tertiary activity figures for May (tomorrow), which are expected to report a fourth monthly increase out of five, to offset some of the recent weakness in the manufacturing sector. Meanwhile, the latest goods trade figures for June are scheduled for release on Thursday. These are expected to report a further narrowing in the trade deficit due not least to an ongoing decline in the value of imports. The value of exports is also expected to have risen despite on going weakness in demand from China – indeed, last week’s Chinese trade numbers suggested that imports from Japan fell more than 14%Y/Y.

UK CPI figures a key highlight this week, with headline inflation expected to drop to a 15-month low, but core inflation likely to have remained more sticky
Ahead of the BoE’s forthcoming policy-setting meeting in early August, all eyes in the UK this week will be on the June CPI release on Wednesday. Having moved sideways in May, headline inflation is expected to have resumed a downwards trend last month, easing a little more than ½ppt to 8.1%Y/Y. This would leave the headline CPI rate down around 3ppts from October’s peak to average 8.5%Y/Y in Q2, a touch firmer than forecast by the BoE in its May Monetary Policy Report (8.2%Y/Y). The drop will in part reflect base effects associated with last year’s spike in energy prices, with the annual rate of that component likely to fall to the lowest in more than two years. Food inflation is also expected to have moderated for a second-successive month. But of most importance for the BoE will be price developments in core items and specifically services. In May, services inflation jumped ½ppt to a 31-year high of 7.4%Y/Y, while non-energy industrial goods inflation also unexpectedly rose to an eight-month high (6.8%Y/Y). We expect core inflation to have moderated only slightly in June, down 0.1ppt to 7.0%Y/Y, although given the persisting strength in private sector wage growth, risks to the forecast appear skewed to the upside.

Friday, meanwhile, will bring June results for retail sales, which are likely to suggest that household spending on goods remained subdued at the end of the second quarter amid an ongoing squeeze on disposable incomes. The latest GfK consumer confidence survey (also Friday) is also expected to show that household purchase intentions remain historically low as concerns surrounding the economic outlook remain.

Final euro area HICP estimates expected to confirm a drop in headline inflation but a slight uptick in core inflation due to base effects associated with Germany’s discounted travel pass last summer
Final euro area inflation estimates for June are also due on Wednesday. The flash release saw the headline HICP rate fall for a second successive month, by 0.6ppt to 5.5%YY, more than 5ppts below October’s peak and the lowest since January 2022. But core inflation ticked higher, by 0.1ppt to 5.4%Y/Y, due to a jump in services inflation. The release of the more granular breakdown this week will likely confirm that this principally reflected base effects associated with Germany’s super-discounted public transport fares last summer. This publication will also provide other measures of underlying inflation, including the trimmed mean and persistent and common component of inflation (PCCI), closely watched by the ECB. German producer price figures for June (Thursday) will offer insight into the outlook for consumer goods inflation.

Thursday also brings an update on economic sentiment at the start of the third quarter, with the European Commission’s flash consumer confidence index for July expected to record a ninth monthly improvement out of the past ten, albeit remaining well below the long-run average. The French INSEE business sentiment survey is also due for release that day. In addition, euro area construction output data for May and new car registrations figures for June will be published on Wednesday.

US retail sales and industrial production due for release this week
In the US, tomorrow will bring an update on monthly activity, with the June reports for retail sales and industrial production. In line with the Bloomberg consensus, Daiwa America’s Lawrence Werther expects retail sales to have risen 0.5%M/M, driven by auto sales as supply improved. Indeed, when excluding autos, Lawrence expects sales to have risen just 0.1%M/M, albeit this impart reflects the impact of lower prices. Meanwhile, industrial production is expected to be flat on the month, with a dip in mining expected to offset a likely modest boost from manufacturing (0.2%M/M). Various July survey results are also due, including the Empire manufacturing index (today), New York Fed services business activity indices (tomorrow), and Philly Fed business indices (Thursday). Housing market data will include the NAHB index (tomorrow), housing starts (Wednesday) and existing home sales (Thursday). 

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