Japan’s nominal wage growth may set the BoJ to pursue a faster pace of tightening in H2’2024

Japan nationwide core CPI likely to reach ~3% by summer

• JPY: Japan’s nationwide core CPI (excluding only fresh food) rises 2.6% YoY in March, down from a 2.8% YoY advance in February. The result is also slightly weaker than consensus expectations for a 2.7% YoY rise. Core-core CPI inflation also moderates from a 3.2% YoY gain in February to a 2.9% YoY increase in March. Goods inflation continues to slow but services inflation remains largely intact which is what is crucial for the BoJ decision on the next interest rate hike – which will likely be driven by whether businesses pass higher labor costs on to service prices. If such a development during April and May takes shape, the typical timing for price revisions, proves more evident than expected, then the possibility of a July rate hike would likely increase.
   
• JPY: Looking forward, Japan’s core inflation looks likely to moderate in April and then pick up in May and beyond — Citi Research expect core CPI to rise 2.3% YoY in April and 2.7% YoY in May. The base effect from substantial markups a year ago probably means that core inflation will moderate in April when many businesses revise prices. However, bolstered by government measures for energy bills, core inflation looks likely to pick up in May and beyond, reaching close to 3% YoY in summer.

March customs-clearance trade data – higher oil prices pose a risk to Japan’s current account

• JPY: Despite a 3.7% MoM increase in March, Japan’s real exports decline by 2.3% QoQ in Q1 (+0.1% QoQ in Q4), the first negative QoQ growth in four quarters, driven by a production halt at an automaker. A recent modest rebound in the global manufacturing cycle has yet to prove definite while Citi Research expect the global economy to decelerate in the second half of this year. Against this backdrop, Japan’s exports look likely to decelerate as well in the coming months and likely to weigh on Japan’s GDP in Q1’2024.
   
• JPY: In addition, rising crude oil prices due to escalating Mideast tensions may well increase Japan’s trade deficit going forward — the trade balance was ¥366.5bn in surplus before seasonal adjustments and ¥701.5bn in deficit after adjustments in March (-¥377.8bn and -¥566.2bn, respectively, in February). The trade deficit after seasonal adjustment expanded somewhat. Given a further rise in crude oil prices in April, CIF prices look likely to continue rising, leading to an increase in the trade deficit.

Week Ahead:

US – core PCE and April (flash) PMIs in focus this week

• USD: US Q1 GDP Annualized QoQ (initial estimate) – Citi: 2.0%, median: 2.5%, prior: 3.4%; Personal Consumption – Citi: 2.8%, median: 2.6%, prior: 3.3%; Core PCE Price Index QoQ – Citi: 3.4%, median: 3.4%, prior: 2.0% - Citi Research expect a 2.0% increase in GDP in Q1, with the largest boost to growth again from personal consumption, which should rise 2.8%. Services consumption will likely be the primary driver of strong spending, with goods consumption falling on the quarter despite surprisingly strong retail sales in March. Expectation for a 0.26% increase in core PCE inflation in March, and assuming no revisions to previous months, would imply a 3.4% QoQ annualized increase in Q1, much stronger than the 2.0% increases in each of Q3 and Q4 2023. Notably, the Fed’s expectation of a stronger increase in March (at 2.8%YoY, which translates to at least 0.31%MoM) implies a 3.5% increase in core PCE. If Citi’s 3.4% forecast for Q1 is realized, this would suggest a very high likelihood that Fed officials would be delivered a downside surprise to their March YoY core PCE forecast (Citi Research expect 2.7%).
   
• USD: US March PCE Deflator MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; PCE Deflator YoY – Citi: 2.6%, median: 2.6%, prior: 2.5%; Core PCE MoM – Citi: 0.3%, median: 0.3%, prior: 0.3%; Core PCE YoY – Citi: 2.7%, median: 2.7%, prior: 2.8% - based on elements of strong CPI but softer PPI, Citi Research again expect another 0.26% increase in core PCE inflation in March. Core non-shelter services prices should rise 0.29%MoM, stronger than in February but not nearly as strong as the 0.65% increase in CPI. A 0.26%MoM increase in core PCE would be on the border of rounding to a 0.2% increase which would imply that the YoY rate falls to 2.7% from 2.8% and the 6-month pace falls from 2.9% to 2.8%.
   
• USD: US March New Home Sales – Citi: 653k, median: 673k, prior: 662k; New Home Sales MoM – Citi: -1.4%, median: 1.6%, prior: -0.3% - new home sales should fall modestly in March to 653k after moving largely sideways in recent months. This could reflect some softer demand with longer-end yields rising from lows reached at the end of last year. Yields and mortgage rates especially increased through April and could imply further downside risks to new home sales next month. New home sales are a generally more timely indicator of housing demand than existing home sales, as new homes are recorded as sold when the process begins (versus existing homes that are counted as sold when the process closes).
   
• USD: US March Durable Goods Orders – Citi: 2.3%, median: 2.8%, prior: 1.3%; Durables ex Transportation – Citi: 0.0%, median: 0.2%, prior: 0.3%; Capital Goods Orders Non-Def ex Aircraft – Citi: 0.3%, median: NA, prior: 0.7% - Citi Research expect durable goods orders to rise 2.3%MoM, mainly driven by transportation. Core durables (excluding transportation) should stay flat, consistent with the underlying trend of weaker durables spending. Non-defense capital goods (excluding aircraft) should rise 0.3%MoM. March industrial production figures showed a strong rebound in the manufacturing production, but this was following weaker production in January and February. Weaker consumer and business demand, likely from a higher rate environment, leaves Citi Research forecasting a drag from business equipment investment in Q1 GDP.
   
• USD: S&P US April (flash) Manufacturing PMI – Citi: 52.1, median: 52.0, prior: 51.9; S&P US Services PMI – Citi: 51.6, median: 52.0, prior: 51.7 – US manufacturing diffusion indices seem to have bottomed and have been above 50-levels (which indicates expansion) in recent months. The pickup in S&P Manufacturing PMI has been driven by key subcomponents such as output, employment and new orders. The employment index could pull back somewhat as hard data on manufacturing employment has been weak in recent months. While Manufacturing PMI could increase modestly to 52.1 from 51.9 in the April preliminary release, Citi Research continue to see any rebound in manufacturing rather limited among slowing real goods demand. Services PMI has remained in expansionary territory although business activity has grown at a somewhat slower pace in the last couple of months. Citi research expect Services PMI to change little in the April release at 51.6 but will be paying attention to the prices paid index that increased in the last report likely in part reflecting higher energy prices.

Euro area and UK – April flash PMIs, German ifo, ECB inflation expectations survey, UK consumer confidence and BoE speak in focus this week

• EUR: Euro Area — the April PMIs (flash) and the German Ifo survey will be released, as well as consumer confidence surveys and more national surveys. Against consensus, Citi Research expect a setback to business and consumer confidence surveys due to the surge in oil prices, geo-political tensions and tightening in global financial conditions. Euro Area PMI Manufacturing, April (flash) – Citi Forecast 45.6, Consensus 46.5, Prior 46.1 (higher oil prices); PMI Services, April (flash) – Citi Forecast 51.0, Consensus 51.9, Prior 51.5; PMI Composite Output, April (flash) – Citi Forecast 49.8, Consensus 50.8, Prior 50.3; German Ifo Business Climate, April – Citi Forecast 88.2, Consensus 88.8, Prior 87.8; Ifo Expectations, April – Citi Forecast 88.5, Consensus 88.9, Prior 87.5; Ifo Current Assessment, April (flash) – Citi Forecast 88.0, Consensus 88.7, Prior 88.1; ECB CES 1Yr Inflation Expectations, March – Citi Forecast 3.2%, Prior 3.1%; 3Yr Inflation Expectations, March – Citi Forecast 2.5%YY, Prior 2.5%.
   
• GBP: UK activity: Seasonal reckoning? UK PMIs have told a more optimistic narrative for UK activity than some of the other survey data as of late. In part, that may reflect a seasonal adjustment that has proven particularly supportive. In April, Citi Research see some downside risks to these data as the bill – in the form of a larger downward adjustment – falls due and therefore look for a modest downside surprise in the services PMI this month. Interesting is whether there will be a further reductions in business expectations given recent news on rates and energy prices. UK: PMI Manufacturing, April (flash) – Citi Forecast 50.2, Consensus 50.4, Prior 50.3 (stalling progress); PMI Services, April (flash) – Citi Forecast 52.6, Consensus 53.0, Prior 53.1 (weaker expectations?).
   
• GBP: BoE: What will BoE chief economist Pill have to say – last week rounded out with some dovish comments from Sir Dave Ramsden who noted the risks around the inflation outlook now appeared tilted to the downside, the MPC will continue to assess ‘the evidence as it accumulates’ and stand ready to respond accordingly. This week the focus will be on Huw Pill. With Ramsden moving – having previously been a more hawkish internal member – confidence is growing that the MPC is on course to signal a further dovish inflection in May. Pill, often the collective voice of the three ‘core’ internal members (Bailey, Broadbent and Pill) will be crucial here in corroborating (or not) such a view. UK GfK Consumer Confidence, March – Citi Forecast -20, Consensus -20, Prior -21 (not going anywhere in a hurry).

Japan – Tokyo CPI and BoJ meeting in focus this week

• JPY: Tokyo CPI to increase 2.2% YoY in April — Citi Research expect core CPI in Tokyo (the CPI excluding fresh food) to increase 2.2% YoY in April, moderating from a 2.4% YoY advance in March. Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, will probably moderate from +2.9% YoY in March to +2.5% YoY in April. The base effect from sharp markups a year ago will probably push down YoY inflation for goods including food. What is crucial for the BoJ decision on the next interest rate hike will be whether businesses pass higher labor costs on to service prices. If such a development takes place during April and May, a typical timing for price revisions, proves more evident than expected, the possibility of a July rate hike would increase, although this remains a low probability scenario for now.
   
• JPY: BoJ policy meeting this week is expected to deliver no change in policy but markets will focus on policymakers’ price outlook as well as the post-meeting press conference.

Commodity Bloc – Australian Q1 CPI, BoC Minutes and CFIB business survey in focus this week

• AUD: Australia Q1 CPI Citi Headline QoQ forecast; 0.9%, Previous; 0.6%; Citi Headline YoY forecast; 3.5%, Previous; 4.1%; Citi trimmed-mean QoQ forecast; 0.9%, Previous; 0.9%; Citi trimmed-mean YoY forecast; 3.9%, Previous; 4.2% - inflation is set to re-accelerate in Q1 on the back of sticky services prices, ongoing increases in housing costs, and regulated price increases. However, the risks to both trimmed-mean and headline inflation are skewed slightly to the downside but if the details are broadly in line with projections, then this could see some hawkish risks for the RBA in the near-term in the form of jawboning but not in the form of rate hikes. The risk scenario is that the RBA will not be cutting interest rates this year, as opposed to the base-case of 25bps worth of cuts.
   
• CAD: Canada Retail Sales (Feb) – Citi: 0.6%, median: 0.1%, prior: -0.3%; Retail Sales ex Auto – Citi: 0.3%, median: 0.0%, prior: 0.5% - Citi Research expect a 0.6%MoM bounce back in retail sales in February after a 0.3% decline in January, stronger than Statistics Canada’s preliminary estimate of a 0.1% increase. Excluding autos, Citi Research expect a 0.3% increase in retail sales. With BoC officials likely split between a June and July rate cut, every data point in the next month and a half will be important.
   
• CAD: BoC Summary of Deliberations (Bank of Canada Minutes) - the April policy decision itself was relatively neutral, with official policy statement guidance leaving out any mention of upcoming rate cuts. But Governor Macklem did note that June is in the “realm of possibility” for cuts when asked about it at the press conference. Citi Research expect the Minutes will be largely neutral, noting progress on inflation but still guiding that further evidence is needed. Hawkish risks could be if the summary notes stronger inflation data in the US (received the morning of the meeting) as suggesting a risk of stickier inflation in Canada. But Macklem at the meeting noted little direct tie between inflation in the two countries, which would have been reaffirmed with softer March Canada CPI data. Most important will be any guidance on what data points over the coming weeks could affect the more dovish officials’ June base case. If activity data do not weaken, particularly if the unemployment rate does not rise in April data released May 10, these officials could be convinced to delay to a July cut.
   
• CAD: BoC’s CFIB Business Barometer (April) - annual measures of core inflation are still largely following trends in the CFIB survey of price plans of businesses, making this an important indicator to watch for the possible speed of BoC rate cuts. Currently, the signal from CFIB prices suggests that core inflation measures will remain stuck around 3% over the next few months, moderating only to around 2.5% by Q4 this year. This would be a much slower pace of easing inflation than experienced over the last few months, with core inflation having dropped from a 3.55% average at the end of last year to 2.95% as of March data. If activity remains supported, with other details of the CFIB survey suggesting improving business sentiment, this could mean that after the start of cuts from the BoC this summer, the pace of cuts will be gradual. Currently, Citi Research expect sequential 25bp rate cuts this year (100bp total) premised on downside risks to activity in both the US and Canada. But if activity remains more supported, fewer cuts are likely.

Asia EM – China 1Yr loan prime rate and Singapore CPI inflation in focus this week

• CNH: China 1-Year Loan Prime Rate (%) – Citi Forecast 3.45, Consensus 3.45, Prior 3.45; 5 -Year Loan Prime Rate (%) – Citi Forecast 3.95, Prior 3.95 – the PBoC kept its 1yr MLF rate unchanged on April 15th, and the chances for LPR cuts this month look very slim without an MLF rate cut. The economic recovery is still on going with GDP growth hitting 5.3%YoY in 24Q1. The dual-tracked recovery is still fragile as indicated by the monthly numbers for March. Citi Research still expect another round of RRR and/or policy rate cuts in 24Q2E.
   
• SGD: Singapore CPI (%YoY) March – Citi Forecast 3.1, Consensus 2.9, Prior 3.4; CPI (NSA, %MoM) – Citi Forecast 0.3, Prior 1.0; Core CPI (%YoY) – Citi Forecast 3.5, Prior 3.6.