Japan April nationwide core inflation rises at its fastest annual pace in more than four decades; Citi Research raise their Japan inflation outlook for 2023 and 2024Posted on
Japan April nationwide core inflation rises at its fastest annual pace in more than four decades; Citi Research raise their Japan inflation outlook for 2023 and 2024
- JPY: Japan’s April nationwide core CPI (all items except fresh food) accelerates to 3.4% YoY, in line with consensus and up from 3.1% in March despite the negative contribution from energy on falling oil and LNG prices while core inflation excluding both fresh food and energy, hits 4.1%y/y in April, marking the fastest rise since 1981. In particular, services inflation accelerates to 1.7%y/y in April from 1.5%y/y in March, suggesting rising labor costs may be starting to feed into broader consumer inflation. Food prices also jump 9.0%y/y in April, faster than the 8.2%y/y gain in March as fresh food companies seem to be passing through import costs of food and staples prices more extensively than initially expected, even as import prices are falling.
- JPY: July BoJ inflation outlook could be revised up — the BoJ’s inflation outlook, released in July, is increasingly likely to be revised up. Citi Research forecast 2.3% YoY for FY2023 core CPI and 3.3% for core-core CPI after the revision versus BoJ’s April median outlook of 1.8% and 2.5% respectively. For the 2023 calendar year, Citi Research raise their core CPI forecast to 2.7% YoY from 2.3%, factoring in unexpectedly higher import cost pass-through and prospective increases in services prices on larger-than-expected wage increases. Citi Research expect the spring 2023 wage negotiations to produce the first base pay increase of over 2% in 30 years. On the assumption that this boosts scheduled wage growth and is passed on in service prices, the team revise up their services inflation outlook. Citi Research also lift their 2024 forecast to 1.7% YoY from 1.6%, pointing to only a marginal increase for now given the poor visibility on spring 2024 wage negotiations but see potential upside for 2024 wage hikes if inflation is still close to 2% at the start of the year.
Week Ahead: US April Core PCE MoM, Durable Goods Orders and May S*P US Manufacturing PMI, UK inflation data, RBNZ MPS and OCR decision, Australia April Real Retail Sales, Canada May CFIB Business Barometer, China 5Y Loan Prime Rate, Singapore CPI (%YoY) April
- USD: US April Core PCE MoM – Citi: 0.4%, median: 0.3%, prior: 0.3%; Core PCE YoY – Citi: 4.7%, median: 4.6%, prior: 4.6%; Personal Income – Citi: 0.5%, median: 0.4%, prior: 0.3%; Personal Spending – Citi: 0.4%, median: 0.4%, prior: 0.0% - core PCE inflation should remain persistently strong in April, with expectations for a 0.38%MoM increase based on elements of CPI and PPI inflation. While this is a similar increase to 0.41%MoM core PCI, the key core non-shelter services price components may rise by a stronger 0.42%MoM in PCE compared to 0.11% in CPI which should highlight the divergence between CPI and PCE inflation. Citi Research’s forecasts would imply core PCE inflation rising slightly to 4.7%YoY, although this will also be sensitive to any revisions to PCE data in the second release of Q1 GDP. Meanwhile, Citi Research expect a 0.5%MoM increase in personal incomes in April, with much of the strength driven by labor incomes while strong labor incomes should be the key factor supporting continued solid aggregate spending.
- USD: US April Durable Goods Orders – Citi: 1.0%, median: -1.0%, prior: 3.2%; Durable Goods Orders ex Trans. – Citi: -0.1%, median: 0.0%, prior: 0.2%; Capital Goods Orders Non-defense ex Air – Citi: -0.2%, median: 0.2%, prior: -0.6% - a theme of strong demand for transportation goods but modest demand for most other manufactured goods should continue in April durable goods orders data. Citi Research expect another strong 1.0%MoM increase in total durable goods orders in April with strength led by a strong increase in auto orders. Excluding transportation goods, Citi Research expect a modest 0.1 decline in durable goods orders and a 0.2% decline in core capital goods orders. This is consistent with manufacturing activity continuing to move sideways or modestly weakening as goods demand peaked over a year ago.
- USD: US May S&P US Manufacturing PMI – Citi: 50.3, median: 50.0, prior: 50.2; S&P US Services PMI – Citi: 51.8, median: 52.6, prior: 53.6 – Citi Research expect that S&P Manufacturing PMI will change very little in the May preliminary release at just above 50 levels indicating just a very modest expansion of activity. This is in line with manufacturing activity that outside of autos should remain soft due to softer real goods demand. The output prices sub-index could pull back slightly after increasing in April as commodities prices increased. Meanwhile, S&P Services PMI should decline slightly to 51.8 which would bring it more in line with ISM Services. Services PMI at 51.8 points to services activity still growing but at a slower pace compared to April though it is still expected to be the main driver of consumption in the coming months.
- GBP: Citi Research expect this week’s UK CPI data to show moderating trends in non-core inflation and expect headline CPI of 8.4% with a well flagged drop in household energy inflation, the predominant driver of the headline reduction – alongside an acceleration in core – and in particular services inflation, leaving core CPI at 6.4-6.5% which is roughly in line with MPC’s expectation. However, headline services inflation of 7.2% would be 40bps above the MPC’s forecasts, and likely a notable hawkish surprise. And overall, with services inflation now above 7%, Citi Research see little signs of an obvious near-term, dovish impulse. Through the remainder of the year, the risks to the MPC’s inflation forecast are skewed to the downside. But alongside strong April wage data, the bar to a rates pause by the BoE MPC is high into June. Instead, a pause is likely only in August.
- NZD: RBNZ May MPS and OCR Decision: Citi forecast; +25bps to 5.5%, Previous; +50bps to 5.25% - the RBNZ is expected to increase the OCR by 25bps at this week’s MPS. The step down to 25bps is largely expected on the back of a slowdown in domestic activity, yet inflation still remaining higher than the central bank’s target. The recent deceleration in inflation expectations would also help steer the hawkish RBNZ towards a lower quantum of rate hikes. Citi Research expect this to be the last rate hike the Bank delivers, which is also in-line with the Bank’s guidance. However, given the NZ Budget last week and substantial amount of rebuild expected in H2’23, there are hawkish risks which could see the RBNZ continue to signal more rate hikes could be needed. Forecasts in the MPS are unlikely to change materially, although there might be some upgrade to growth estimates in H2 because of reconstruction post Cyclone. The RBNZ though, is likely to continue to suggest that inflation risks remain skewed to the upside and is unlikely to turn dovish anytime soon with rate cuts also unlikely in 2023.
- AUD: Australia April Real Retail Sales: Citi forecast; 0.4%, Previous; 0.4% - retail sales likely expanded again in April, although there are downside risks given the slowdown in discretionary household goods consumption in recent months. Goods spending accounts for around 80% of retail sales, and after a fall in March, Citi Research expect a similar fall in goods retailing in April. However, this is expected to be more than offset by higher spending on services. But it’s worth noting that while nominal retail sales are expected to increase, the pace isn’t enough to offset higher prices and volumes are likely going backwards suggesting that overall consumption growth is softening.
- CAD: Canada CFIB Business Barometer (May) - while not explicitly a measure of inflation expectations, the average planned price increase among businesses surveyed in the monthly CFIB survey remains a preferred survey measure for assessing the path of Canada’s inflation. Price plans have moderated from 2022 highs but remain more consistently in a 3.5-4% range in recent months. This suggests core inflation measures are also stabilizing around this range soon. The BoC has consistently communicated that stably above-target core inflation would mean there is still more to do in terms of tightening monetary policy.
- CNH: China 5-Year Loan Prime Rate: Citi Forecast 4.30, Consensus 4.30, Prior 4.30; 1-Year Loan Prime Rate – Citi Forecast 3.65, Consensus 3.65, Prior 3.65 – the PBoC kept its core policy rate 1Y MLF unchanged on May 15 while continuing to guide down deposit rates for certain products in the same week. The room for LPR cut is slim this month without an outright MLF rate cut. That said, weakening economic data could warrant more policy support. Citi Research continue to see 20bps MLF rate cut for the remainder of this year.
- SGD: Singapore CPI (%YoY) April: Citi Forecast 6.1, Prior 5.5; CPI (NSA, %MoM): Citi Forecast 0.4, Prior 0.5; Core CPI (%YoY): Citi Forecast 4.7, Prior 5.0; Singapore GDP (%YoY) 1Q F: Citi Forecast 0.2, Prior 0.1; GDP (SA, %QoQ): Citi Forecast -0.7, Prior -0.7; Singapore Industrial Production (%YoY) April: Citi Forecast -3.9, Prior -4.2; Industrial Production (SA, %MoM): Citi Forecast -0.8, Prior 9.3.