Data highlights this week

Today:
While Japan’s national accounts figures last week reported a larger than expected contraction in economic output in Q1 – by -0.5%Q/Q – this principally reflected the impact of the temporary halt in car production amid concerns that safety tests at Daihatsu had been rigged. Indeed, exports (-5.0%Q/Q) fell the most since the start of the pandemic in Q120, while the decline in household consumption (-0.7%Q/Q) related to a sharp drop in spending on durable goods. In contrast, spending on services rose (1.0%Q/Q) for a seventh quarter out of the past eight. Nevertheless, today’s monthly tertiary activity figures posted a larger-than-expected drop in March, by 2.4%M/M, the most since May 2020. The weakness was broad-based, but there was a sizeable drop in transport activities, wholesale trade of machinery and equipment and retail trade. But it also likely reflected some payback for the strength in February, for which the level of overall tertiary activity rose to the highest since before the consumption tax hike in October 2019. Despite the drop in March, tertiary activity was still up 0.2%Q/Q in Q1.

Tomorrow:
A relatively quiet day for top-tier releases tomorrow will bring euro area goods trade and construction output figures for March. The euro area’s trade surplus is forecast to have widened slightly at the end of the first quarter by €2.1bn to €20.0bn, albeit remaining someway below the series high reached in January (€27.1bn). Meanwhile, construction activity is expected to have risen for a fourth consecutive month in line with the increase in Germany (+1.0%M/M) and France (+1.1%M/M).

Wednesday:
All eyes will be on UK inflation data for April. Given the 12% cut in Ofgem’s energy price cap from the start of April, we expect headline CPI to take a notable step down by 1.1ppt to 2.1%Y/Y, which would be bang in line with the BoE’s latest projection and mark the lowest rate since July 2021. It will also be below the equivalent rates in the US, euro area and Japan. Due to base effects, food inflation is also expected to slow significantly further to around 4.3%Y/Y to be almost 12ppts below the peak a year ago. But more encouraging for the MPC will be the moderation in core inflation – our expectation is for a drop of 0.7ppt to a 30-month low of 3.5%Y/Y – principally reflecting base effects around the early timing of Easter this year. In particular, we expect services inflation to drop a little more than ½ppt to a near-two-year low of 5.3%Y/Y, while non-energy industrial goods inflation is forecast to decline to a near-four-year low of 0.5%Y/Y. While a touch lower than in the US, that core rate would still, however, be some way above the equivalent rates in the euro area and Japan.

In Japan, goods trade figures for April will offer some insight into economic activity at the start of Q2. While exports are expected to have risen at a double-digit annual pace in April, a pickup in the value of imports due in part to base effects, will limit the narrowing in the trade deficit. Meanwhile, the latest machinery orders figures for March will offer a guide to private capex over the second quarter. Having risen to a thirteen-month high in February, the forecast decline of 2.2%M/M would still leave core orders up more than 2½%3M/3M in Q1 pointing to a rebound in private capex in Q2.

In the US, focus will be on the minutes from the FOMC meeting on 30 April-1 May, when the Fed left the target range for the Fed Funds Rate unchanged at 5.25-5.50%, but acknowledged the recent lack of further progress in achieving the 2% target. The minutes will also likely provide greater insight into discussions about the Committee’s adjustment to the monthly redemption cap on maturing Treasury securities from $60bn to $25bn.

Thursday:
The main focus on Thursday will be the flash May PMIs from the major economies. The European surveys are likely to remain consistent with ongoing recovery momentum and services led. In particular, having surprised to the upside in April rising to an eleven-month high of 51.7, some 2.5pts above the Q1 average, the euro area’s composite PMI is expected to have moved broadly sideways in May and therefore on track for another quarter of steady GDP growth in Q2. The Commission’s preliminary consumer confidence index for May is also due and forecast to rise for a fourth consecutive month (-14.0) to its highest since February 2022 as households benefit from rising real disposable incomes. ECB policymakers will also be focused on the its negotiated wage growth indicator for Q1, which might well report only a small moderation from growth of 4.5%Y/Y in Q4, albeit this will in part reflect one-off payments to compensate for above-target inflation over recent years, rather than a pickup in underlying pay pressures which appear to be moderating.

In the UK, the composite output PMI might well ease back from April’s 12-month high (54.1), albeit remaining consistent with ongoing solid recovery momentum in the middle of the second quarter as demand for consumer-facing services was likely boosted by the improved weather conditions. The price PMIs will also be watched closely for signs of pass through to consumers from the recent pickup in costs related not least to the hike in the National Living Wage. Indeed, while the composite input price PMI rose 3.5pts in a nine-month high in April, the output price PMI edged down to a seven-month low.

Meanwhile, the Japanese output PMIs will also likely point to a pickup in recovery momentum amid an improvement in services and manufacturing conditions following the contraction in Q1. In contrast, the US PMIs are expected to signal a softening in economic activity in the middle of Q2.

Friday:
In Japan, the end of the week will bring national inflation figures for April. The forward-looking Tokyo CPI figures published on 26 April saw the headline rate drop 0.8ppt to 1.8%Y/Y, principally due to the introduction of for free high school tuition. When excluding fresh food and energy, the BoJ’s preferred core measure fell 1.1ppt to a 19-month low of 1.8%Y/Y. While the impact of free school tuition will be slightly less pronounced for the nationwide CPI figures and higher energy prices will provide some offset, headline inflation is expected to have eased 0.3ppt to 2.4%Y/Y in April, the lowest since June 2022. But while the core measures are also expected to have moderated, they are also expected to remain above the 2% target.

In the UK, Friday will bring retail sales figures for April. Tallying with recent retail surveys, however, the sales figures are expected to start the second quarter on the backfoot as demand on the High Street was dampened by heavy rainfall that month. The latest GfK consumer survey for May will also be published. And Ofgem’s announcement of its July energy tariff cap, also due that will give further insight into the inflation outlook.

In the US, durable goods orders figures for April are likely to be dragged lower by volatility in aircraft bookings as ongoing quality control issues at Boeing led to net cancellations in new orders in April. Orders excluding transportation have increased in only two of the past six months, with the flat trend suggesting that restrictive monetary policy is continuing to constrain investment in capital equipment.