European and Japanese inflation in focus

Chris Scicluna; Emily Nicol

Key data highlights in the week ahead

The overnight release of Japanese machinery orders data provided an upside surprise, with core orders – which offer a guide to private sector capex three months ahead – jumping 7.7%M/M in February, the most since May 2021. This left orders up 0.7%Y/Y, the first positive annual rate in a year. There was strong growth in orders placed by manufacturers – driven by likely one-off jump in the electrical machinery sector – and core non-manufacturers, which rose to the highest level in thirteen months. And so, while manufacturing orders were still trending well below the Q4 average (-6.8%) – due in part to a notable decline in the autos sector – non-manufacturers orders were trending more than 9½% higher. Overall, core orders were up more than 2% compared with the Q4 average, suggesting positive capex growth over the summer.

This morning will bring euro area industrial production figures for February. Based on the equivalent figures from the member states – which reported growth in Germany, Netherlands and Ireland but declines in Belgium and Greece – aggregate euro area IP is expected to have increased almost 1.0%M/M in February. However, the official Eurostat euro area figures have differed substantially from the country breakdown over recent months, with a decline of 3.2%M/M in January much larger than the drop of 1.7%M/M implied by the member state data.

US retail sales figures for March due later today are expected to show that spending remained subdued as higher prices weighed on demand. Admittedly, a price boost to sales of gasoline will offset a sharp drop in new car sales that month. Overall, Daiwa America’s Lawrence Werther forecasts a rise of 0.3%M/M, down from 0.6%M/M in February, which would leave sales down ½%Q/Q in Q1.

A key focus tomorrow will be the latest UK labour market report. While the number of payrolled employees rose in February (20k) and Friday’s GDP data signalled moderate recovery momentum that month, given the steady downtrend in job vacancies, the unemployment rate is expected to have ticked slightly higher for a second successive month in the three months to February, by 0.1ppt to 4.0%, nevertheless suggestive of a still tight labour market. Meanwhile, having moderated in January to its softest rate in 18 months (5.6%3M/Y), total wage growth is likely to have eased slightly further in the three months to February, with regular pay growth similarly set to have edged lower from 6.1%3M/Y previously.

In the US, industrial production is expected to have risen 0.4%M/M up in March – the most since November – supported by a rebound in mining and utility output. In contrast, manufacturing production is expected to be little changed at 0.1%M/M.

Attention will also be on the first estimate of China’s Q1 GDP, which will be accompanied by March retail sales and industrial production figures. GDP is expected to have risen ½%Q/Q in Q1, although this would see the annual rate ease back below 5%Y/Y.

The main focus in Europe will be March inflation estimates. The flash euro area release brought a modest downside surprise, with the headline and core HICP rates down 0.2ppt a piece to 2.4%Y/Y, matching November’s 28-month low, and 2.9%Y/Y, a two-year low, respectively. Given their flash estimates to two decimal places, both the headline (2.44%Y/Y) and core rates (2.95%Y/Y) appear at risk of a potential upwards revision, although much will depend on the final estimates of Italian inflation (tomorrow). The euro area release will bring the granular detail, which will be used to calculate other measures of underlying inflationary pressures closely watched by the ECB.

In the UK, we expect headline inflation to fall for a second successive month in March, by 0.2ppt to 3.2%Y/Y, which would be the lowest rate since September 2021 and almost 8ppts below the peak in October 2022. While the energy component will again likely add slightly to inflation due in part to higher petrol prices, we expect the other major components to more than offset that impact, with food inflation likely falling more than 1ppt to its lowest level since March 2022 and core goods inflation likely falling about ½ppt to the lowest since April 2021. Not least due to the early Easter holiday period this year, the downtrend in services inflation is likely to be more modest, easing only slightly from 6.1%Y/Y in February, which would be the softest rate since January 2023 but above the MPC’s forecast. Overall, we expect core inflation to fall a further 0.3ppt to 4.2%Y/Y, which would be the lowest since December 2021.

In Asia, Japan’s goods trade figures for March will provide an update on the likely contribution from net trade to GDP growth in Q1. The adjusted trade deficit is expected to have narrowed slightly in March. And while export volumes in February were trending some 4% below the Q4 average, import volumes were down more than 7% on the same basis sharply in January and February.

A relatively quiet day for releases kicks off with Japan’s tertiary output figures for February. Activity is expected to have risen for a third consecutive month, by around 0.5%M/M, boosted not least by an increase in overseas visitors around the Lunar New Year holidays.

In the euro area, construction activity is expected to have posted a solid rise in February, supported by the extreme weather-assisted surge in Germany (7.9%M/M).

In the US, existing home sales figures are expected to report a further moderation in March (-3.0%M/M) following a cumulative jump of almost 13% since the start of the year, as supply remains tight and affordability continues to be constrained by elevated prices and borrowing rates.

Attention on Friday will turn to Japanese inflation figures for March. Having jumped back to 2.8%Y/Y in February, the headline CPI rate is expected to have moved sideways on the month, although the upwards tick in the headline Tokyo CPI rate might suggest that risks are skewed slightly to the upside. The core CPI rate (excluding fresh foods) is forecast to have eased slightly from 2.8%Y/Y in February, while the BoJ’s preferred core measure (excluding fresh foods and energy) is forecast to have fallen to 3.0%Y/Y for the first time since December 2022, amid a decline in processed foods inflation and lower contribution from hotel charges, albeit remaining comfortably above the BoJ’s 2% target and still consistent with expectations that the Policy Board will revise up its inflation forecasts for FY24 later this month.

UK retail sales figures for March are also due. While the BRC’s retail monitor suggested that wet weather had dampened demand for garden furniture, BBQs and clothing, the survey also signalled a pickup in food sales ahead of the Easter holiday. And so, having moved sideways in February, sales are expected to have risen in March, by as much as ½%M/M, which would leave them on average in Q1 some 2% above the Q4 average.

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