FX - The Week Ahead: Japan September CPI - Inflation slowed on fuel subsidies, demand-driven pressure intact otherwise

Inflation looks healthy, lending support to more BoJ tightening

• JPY: The nationwide headline CPI fell from prior month’s 3% to 2.5% while core CPI (excluding only fresh food) increased 2.4% in September, slowing from a 2.8% YoY advance in August. The result was slightly above the median market projection for a 2.3% YoY rise.
• JPY: The contribution of energy decreased from +0.94ppt in August to +0.46ppt in September, reflecting the resumption of government subsidies for electricity and gas bills. These subsidies are expected to contain energy’s positive contribution through November under the current program, although they could be extended as part of economic measures to come.
• JPY: Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, increased 2.1% YoY in September, picking up from a 2.0% YoY climb in August and again overshooting the median market projection for a 2.0% YoY rise. The contribution of hotel charges decreased from +0.12ppt in August to +0.08ppt in September, reflecting the base effect of sharp price hikes a year ago. The contribution of mobile phone charges remained the same at +0.01ppt.
• JPY: Core CPI excluding special factors, i.e., core-core CPI excluding mobile phone charges and hotel charges, increased 2.02% YoY in September, up from a 1.96% YoY advance in August. As discussed below, surging rice prices and earlier yen depreciation likely pushed up inflation for goods including food and clothes.
• JPY: Going forward, Citi Research expect core CPI to rise 2.2% YoY in October and 2.5% YoY in November. Energy inflation looks likely to pick up in November, when government subsidies for electricity and gas bills are reduced.
• JPY: Citi Research maintain projection for a December rate hike. However, the BoJ could well wait until next January if it wants to gather more information about spring wage negotiations in 2025 (market pricing also points to a January hike).

Week Ahead:

US – September inflation data US – October S&P PMI in focus

• USD: October S&P US Manufacturing PMI – Citi forecast : 46.6, median: 47.5, prior: 47.3, S&P US Services PMI – Citi forecast: 54.0, median: 55.0, prior: 55.2, Manufacturing survey diffusion indices have remained in contraction for several months in a row with key details such as production and new orders also in contraction. The employment indices have been weak as well, which has aligned with falling manufacturing payrolls. The manufacturing production index published by the Fed has mainly just moved sideways this year. Durable goods orders excluding transportation, which can be volatile, have been growing only very modestly. The October manufacturing PMI report could be impacted by disruptions to production due to worker strikes at a large aircraft manufacturer. We expect manufacturing PMI to fall further in contraction to 46.6 from 47.3 in the October preliminary release. Unlike manufacturing, the services PMIs have stayed generally in expansion pointing to continued growth in services activity. Citi Research expect the S&P Services PMI to fall modestly to 54.0 from 55.2 in the October preliminary release. We will be paying attention to the employment index too, which has stayed in contraction in the last two readings.

Europe and UK – Euro area PMI, Ifo survey, UK public finances data, UK PMI

• EUR: Euro Area growth watch — Rising ZEW and Sentix Investor Confidence Surveys could also herald improvements in the forward-looking components of the PMIs (Thursday) and the Ifo survey (Friday). However, it may take time for hopes on large stimulus in China to affect European businesses and consumers. We remain cautious and expect slightly lower business confidence prints for October.
• GBP: UK: Public finance release — Citi Research expect a further overshoot in the September public finances data, with CGNCR of £18.5bn versus OBR expectations of £15.9. The main drivers as we see it here reflect 1) higher public sector pay settlements, some of which will materialize this month, alongside 2) continued departmental overshoots. For now, Citi Research continue to expect an overshoot in full year CGNCR of around £25bn, but we see some risks here to the upside ahead of the 30 October budget.
• GBP: UK: Growth update — The preliminary October PMI data will be published. Here the focus is on the employment components after recent news flow around a potential NICs cut, as well as further evidence on output and price growth. Citi Research expect both to moderate marginally, with the soft data we think likely to remain broadly subdued into year end.

Japan – Tokyo CPI

• JPY: Tokyo CPI October: Headline CPI, Citi Research forecast: 2.0%YoY, previous: 2.2%YoY, excluding fresh food, Citi Research forecast: 1.8%YoY, previous: 2.0%YoY, excluding fresh food and energy, Citi Research forecast: 1.7%YoY, previous: 1.6%YoY, Citi Research expect the core CPI in Tokyo (CPI excluding fresh food) to increase 1.8% YoY in October, down from a 2.0% YoY advance in September. Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, will probably increase 1.7% YoY in October, picking up slightly from a 1.6% YoY rise in September. If Citi Research forecast is correct, this would provide support for monetary policy normalization by the BoJ. Citi Research pencil in a 2.0% YoY increase for the overall CPI in October after a 2.2% YoY rise in September.

Commodity Bloc – BoC rate decision

• CAD: Bank of Canada Rate Decision – Citi forecast: 3.75%, median: 4.00%, prior: 4.25%, For a few months now we have seen building evidence that the BoC’s expectation for an acceleration in activity in the second half of the year was overly optimistic. This led Citi Research to change base case back in early August for a larger 50bp cut from the BoC in October. Reasons for the larger cut will be inherently dovish, but some remaining optimism around the growth outlook could mean the decision is perceived by markets as more balanced as opposed to obviously dovish. However, risks around the policy guidance lean dovish.

Asia EM – China LPR rates

• CNH: China LPR rates – 1-year LPR, Citi forecast: 3.15%, prior: 3.35%, 5-yr LPR, Citi forecast: 3.65%, prior: 3.85%, The PBoC announced 20bps cut of its 7d Reverse Repo at the press conference on September 24th, and the cut materialized later in September. The October LPR rates could follow such a rate cut. Meanwhile, mortgage repricing is steadily ongoing and expected to be effective from this month. For the ongoing policy shift, all eyes are on the details of fiscal support.