A meaningful BoJ policy shift may come from reduced bond buying rather than rate hikes

Japan April nationwide CPI - services inflation largely unchanged

• JPY: Japan’s nationwide core CPI (excluding only fresh food) rises by 2.2% YoY in April, down from a 2.6% YoY advance in March but matching consensus expectations. Core-core CPI inflation also slows from a 2.9% YoY increase in March to a 2.4% YoY gain in April, driven by continued moderation of goods inflation. Excluding the impact of free high-school tuition, services inflation remains largely intact. Given the lack of aggressive pass-throughs of higher labor costs on to service prices even in the typical month of price revisions, Citi Research now see a smaller chance of supporting data for a rate hike in the June and July MPMs. This leaves the immediate focus on the extent of the boost to macroeconomic wages (scheduled cash earnings - base pay), from wage hikes achieved in this year’s spring wage negotiations.

• JPY: Citi Research expect core inflation to hover around the upper-2% range in May and beyond — going forward, core CPI is expected to rise 2.6% YoY both in May and June and expect core inflation to stay in the higher-2% range this summer. As for the pass through from Yen weakness, so far Yen depreciation looks unlikely to have any major impact on inflation data before June and July MPMs — average USDJPY rate in April was up 15.2% YoY, an acceleration of c9% from a 6.8% YoY advance in December 2023. Citi Research estimate that a 10% depreciation of the Yen would push up core-core CPI (YoY) by 0.6ppt after six months. Based on this, core-core CPI is expected to be boosted by 0.5ppt after October. While the pass-through could be faster and larger in a higher inflation environment, Yen depreciation has yet to have a meaningful impact on inflation data before policymakers meet for policy decisions in June and July.

MAS expected to keep the NEER band’s parameters unchanged well into 2025

• SGD: Singapore’s 1Q24 GDP comes in unchanged from Advance Estimates at +2.7% YoY, +0.1% QoQ SA better than consensus (+2.5% YoY, -0.3% QoQ SA) forecasts. Downward revisions to manufacturing are offset by upward revisions in services. Notably, Singapore’ BoP surplus more than doubles (15.9% of GDP, 4Q: 7.5%), amidst a wider CA surplus (1Q: 21.6% of GDP, 4Q: 19.5%) and a sharply narrower financial account deficit (4.7% of GDP, 4Q: 11.3%) on a sharp reduction in banking related “Other Investment” net outflows, even as net direct investment inflows narrow amidst broadly stable net portfolio outflows.

• SGD: Singapore’s MTI maintains 2024 growth forecast at 1-3% (Citi: 2.8%, 2025: 3%), amidst “better than expected” external growth in 1Q24 although expects growth in major economies to taper in “immediate quarters” in tight financial conditions, before picking up on anticipated rate cuts later in 2024. Singapore’s manufacturing and trade related sectors are thus still expected to see a “gradual pickup in growth” over the course of the year. MTI’s latest assessment is consistent with MAS’s April Macroeconomic Review report, which saw - (a) a soft landing for the global economy, (b) the manufacturing pullback as temporary, (c) lower interest rates supporting financial sector and (d) narrower output gap closing by year end.

• SGD: Singapore’s unit labor costs and nominal wage growth accelerate against MAS expectations for a moderation and point to a gentler than expected easing of job market tightness than MAS had expected (if at all). Meanwhile, Citi Research expects core CPI to stay on a “gradual” moderating trend for the rest of the year, stepping down more discernibly in 4Q24. Both headline and core CPI are still seen at 2.5-3.5% in 2024, with two sided risks, though the April MR seems to give greater weight to upside risks.
   
• SGD: Stronger than expected GDP growth and wages, in-line inflation outturns, and broadly hawkish tone of the MAS’s Macroeconomic Review reaffirms the view of a higher hurdle to ease than tighten. In particular, continued stickiness in services inflation may highlight the upside risks stemming from wage costs as the cyclical recovery progresses. Any easing likely requires a conviction that core CPI will fall significantly below the 1.7% average. In the absence of this, Fed cuts are in themselves are unlikely to trigger MAS easing.

Week Ahead:

US – Core PCE, personal income/ spending and the Conference Board’s consumer confidence in focus this week

• USD: US April PCE Deflator MoM – Citi: 0.3%, median: 0.3%, prior: 0.3, PCE Deflator YoY – Citi: 2.7%, median: 2.7%, prior: 2.7%. Core PCE MoM – Citi: 0.2%, median: 0.3%, prior: 0.3%, Core PCE YoY – Citi: 2.7%, median: 2.8%, prior: 2.8% - Citi Research expect core PCE inflation to slow in April to 0.24%MoM, a pace that would round to 0.2% for the first time since 2023. YoY core PCE should rise 2.7%, based partly on expectations that March core PCE could be revised modestly lower. Notably, both the month and annual changes will likely be on the border of rounding higher or lower, and any combination of 0.2%/0.3% monthly and 2.7%/2.8% annual increases is possible. Details should show gradual slowing in housing services inflation similar to CPI and slowing in core services ex housing relative to March.
   
• USD: US April Personal Spending – Citi: 0.2%, median: 0.3%, prior: 0.8%; Real Personal Spending – Citi: 0.0%, median: NA, prior: 0.5% - Citi Research expect personal income to rise 0.2%MoM in April, a softer increase compared to the last few months. Wages and salaries typically account for slightly more than half of personal income and should register a modest increase this month after private payrolls were flat in April. The labor market has showed signs of slowing, with lower hiring rates and higher permanent unemployment. Personal spending should rise 0.3%MoM in nominal terms and should be flat in real terms. Nominal goods spending should fall 0.2%MoM while services spending should offset the decline, rising 0.4%MoM. Initial signs of slowing consumption have emerged, and Citi Research expect consumption to modestly boost GDP in Q2.

• USD: US May Conference Board Consumer Confidence – Citi: 94.8, median: 96.5, prior: 97.0 - consumer confidence has been deteriorating over the last few months as inflation expectations have been increasing amidst gasoline prices rising during Q1 and also stronger realized inflation. Citi Research expect this will be reflected in lower Conference Board Consumer Confidence Index for May which should fall to 94.8 from 97.0. This would be the lowest level in the index in the last couple of years. The conference board measure is also sensitive to employment conditions. Various indicators such as the lower hiring and quits rates in the JOLTS report, weaker ISM and PMI employment details are pointing to a slower rate of hiring which implies downside risk for the labor market differential in the Conference Board report.

Euro area, UK – Euro area May CPI (flash) and Swiss Q1 GDP in focus this week

• EUR: Euro area HICP May (preliminary ) – CPI YoY – Consensus 2.5%, Prior 2.4%; CPI MoM – Consensus 0.2%, Prior 0.6%; Core CPI YoY – 2.7%, Prior 2.7%
   
• CHF: Switzerland Q1 GDP QoQ – Consensus 0.3%, Prior 0.3%; GDP YoY – 0.7%, Prior 0.6%.

Japan – Tokyo May CPI in focus this week

• JPY: Tokyo core CPI to increase 1.9% YoY in May — Citi Research expect core CPI in Tokyo (CPI excluding fresh food) to increase 1.9% YoY in May, up from a 1.6% YoY rise in April. A hike for renewable energy surcharges probably pushed up electricity prices. With government subsidies for electricity and gas prices ending, Citi Research expect energy’s contribution to turn notably positive from June, pushing up core inflation. Meanwhile, CPI excluding fresh food and energy, i.e., core-core CPI, will probably moderate from +1.8% YoY in April to +1.6% YoY in May. The base effect from sharp markups a year ago will probably push down YoY inflation for goods.

Commodity Bloc – Australian retail trade, inflation gauge and Canada Q1 GDP in focus this week

• AUD: Australia April Retail Trade - Citi MoM forecast; 0.3%, Previous; -0.4% - the April retail trade data should be cleaner when compared to recent months. That said, Citi Research are wary of some upside risk to the seasonally adjusted result based on patterns in previous years though stick to their forecast for a 0.3% increase in retail trade in April.
   
• AUD: Australia April CPI Indicator YoY - Citi forecast; 3.3%, Previous; 3.5% - Citi Research forecast the April YoY CPI Indicator to increase by 3.3%. This would show a return to easing inflation after a few months where the Indicator leveled-out at 3.4% to 3.5%. Moderation in the Indicator in April is supported by the performance of the MI Inflation Gauge. In yearly terms this eased from 3.8% to 3.7% in April. In monthly terms the CPI Indicator is forecast to increase by 0.43%, slower than the 0.7% reported for March. But given the amount of missing prices in the April data and barring a shock higher result above 3.5%, Citi Research don’t expect the RBA to alter its policy stance from this data.
   
• CAD: Canada Quarterly GDP Annualized (Q1) – Citi: 1.9%, median: 2.0%, prior: 1.0% - Citi Research expect a 1.9% increase in Q1 GDP, softer than the ~2.5% growth implied by average GDP by industry in Q1 and the BoC’s forecast as of April of 2.8%. A large decline in exports in March imply net exports are likely to weigh on growth in Q1 after providing a large boost to activity in Q4. Consumption however is likely to be stronger in Q1. Goods spending should rise modestly but Citi Research expect a rebound in services consumption. Still, the rebound in Q1 is likely to be softer than presumed a few months ago as initial green shoots for growth look more muted and possibly short lived. The overall picture of H1 may suggest little change to the BoC’s assessment of the output gap. But as signs of the pick-up in activity in H1 are more limited than just a few months ago, Citi Research continue to expect a continued slowing in activity in H2 as the labor market and demand in the US softens further as well.

Asia EM – China’s official manufacturing PMI in focus this week

• CNH: China Manufacturing PMI May – Citi Forecast 50.4, Prior 50.4 – Citi Research anticipate the manufacturing PMI to remain in the expansionary zone at around 50.4 in May. High frequency data suggests construction and industrial activities could remain stable. The operation rate of cement mills continued its steady recovery since mid-March. The operation rate of asphalt has also rebounded since end-April, and steel inventory reduced by another 6.6%. New export orders may also show their resilience as indicated in BDI index. Policy efforts to save the property market are clearly escalating, but it would take time for the impact to show, if any.