Japanese Annual Core CPI Inflation Highest Since 1992
Economic news and commentary for May 19, 2023
Japan CPI
Based on the latest data release, Japanese headline inflation has officially been over the Bank of Japan’s 2% target for a year. Japan's CPI grew 0.6% MoM and 3.5% YoY in April, up from 3.2% YoY in March. This is also the ninth consecutive month of headline inflation over 3% after peaking at 4.3% YoY in January 2023. The main cause was the run-up in food prices over the last year. In April 2023, food prices jumped another 1.1% MoM, pushing the annual inflation rate to 8.4% YoY which is the highest increase in that category since 1980. Pressures in the food component are replacing the previous pressures of the energy component which was up as much as 14.6% YoY earlier this year. Now, energy prices are down -4.4% YoY after another slight -0.2% MoM decline in April.
The real focus will be on core CPI data which the Bank of Japan looks at more closely to make decisions about monetary policy. In April, core CPI grew 0.6% MoM and 2.5% YoY, which is an acceleration from 2.3% YoY in March. While the core inflation number doesn’t seem very high, it is actually the highest since 1992. The main driver of core price growth is the increase in the furniture & household items segment which grew 2.5% MoM in April after a 2.0% MoM increase in March and is now up 10.0% YoY. Both durable and non-durable household goods inflation are elevated, at 9.8% YoY and 12.6% YoY respectively, as consumer demand for goods remains strong. And while domestic services prices are still relatively contained (up just 2.0% YoY), it doesn’t have a major impact on aggregate inflation numbers.
These strong inflation numbers come after Japan released a stronger-than-expected increase in GDP in Q1 2023. The overheating of the economy caused by ultra-loose monetary policy is more evident than ever especially since the divergence of the rest of the world’s central banks has caused economic slowdowns elsewhere. This has helped to bring down energy prices, which has kept a lid on Japan’s headline CPI growth, but the contraction in other countries’ good sectors has seen global trade decline which has put downward pressure on Japanese imports and, as a result, upward pressure on Japanese prices. The Bank of Japan needs to start some sort of monetary policy normalization process soon, and many analysts are now projecting that this will happen as early as the end of Q2.
Still to come…
10:00 am (EST) - EU Consumer Confidence Flash
7:30 pm - Reserve Bank of Australia Minutes
Morning Reading List
Other Data Releases Today
Germany's PPI grew 0.3% MoM and 4.1% YoY in April, down from 6.7% YoY in March. This is the smallest increase since April 2021. Energy prices grew 1.0% MoM, the first monthly increase since September 2022. Non-durable goods prices were up 11.4% YoY.
Unfilled manufacturing orders in Germany fell -1.3% MoM and -1.2% YoY in March. Capital goods orders declined -1.4% MoM with the drop spread about evenly across foreign and domestic orders.
Canada's New Housing Index edged down another 0.1% MoM in April, extending six straight declines since August 2022. On an annual basis, new home prices were down -0.2% YoY which is the first decline since November 2019.
Canada's retail sales fell -1.4% MoM in March as auto sales (-4.4% MoM) and gas sales (-3.9% MoM) both saw substantial declines. Retail sales were up 0.7% QoQ in Q1 2023. In volume terms, retail sales were up 1.2% QoQ. Core sales (ex autos, gas) were up 0.3% MoM, the 4th consecutive increase. The increase in core sales was led by building materials up 1.6% MoM.
US Existing Home Sales
Existing Home Sales Fall for Second Month in a Row in April (TD Bank) - Existing home sales fell 3.4% month-on-month (m/m) to 4.28 million units (annualized) in April, broadly in line with market expectations. Activity is down 23% compared to a year ago, but still up 7% from the recent cycle low of 4.0 million recorded in January.
US home sales hit by affordability and supply constraints (ING) - US home sales remain subdued thanks to elevated borrowing costs, high prices and a lack of supply. New home sales should continue to outperform existing ones in this environment, but price risks remain skewed to the downside. Commercial real estate woes are the bigger concern as office vacancies and higher refinancing risks point to rising loan losses.
Existing Home Sales Retreat Amid Mortgage Rate Volatility (NAHB) - Existing home sales fell to three-month low in April as limited inventory and fluctuating mortgage rates continued to weight on homebuyers, according to the National Association of Realtors (NAR). With inflation continuing to ease and rent growth expected to slow, existing home sales will rebound, despite the recent declines.
Limited Listings (BMO) - Existing home sales fell as expected, but it is still holding above the cycle low. After taking a hit last year, the housing market looks to be stabilizing amid a lack of new listings, while a still-sturdy job market is shoring up demand.
Existing Home Sales Declined 3.4% in April (First Trust Portfolios) - Existing home sales slipped 3.4% in April as homebuyers continue to navigate a challenging housing market. We expect the outlook to be choppy moving forward as the housing market faces a series of crosswinds. First, mortgage rates that are currently hovering near 7% remain a headwind to activity.
US
The U.S. Debt Ceiling: Playing with Fire (TD Bank) - Time is running out for Congress to raise the debt ceiling and prevent the U.S. government from defaulting on its obligations. The impact of a prolonged debt ceiling standoff could be greater today than in the past, especially considering the economy is operating in the later stages of the cycle, where financial vulnerabilities are far higher.
The U.S. Dollar in the Global Economy (Michelle Neal, NY Fed) - Remarks at the 2nd Annual International Roles of the U.S. Dollar Conference, Federal Reserve Bank of New York, New York City.
Banks’ Balance-Sheet Costs and ON RRP Investment (Liberty Street Economics, NY Fed) - Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.
Remarks on liquidity provision and on the economic outlook and monetary policy (Lorie Logan, Dallas Fed) - Dallas Fed President Lorie Logan delivered these remarks to the Texas Bankers Association in San Antonio, Texas.
Recent growth of professional services jobs favors select Texas counties (Dallas Fed) - Professional services jobs have grown faster in Texas than in the U.S. since 2020, partly because of business relocations to the state. This expansion has been highly geographically clustered, with 10 of Texas’ 254 counties accounting for more than 92 percent of the statewide growth. Most of these areas have large, highly educated workforces.
Europe
National Bank of Hungary Preview: Ready, steady, go (ING) - The National Bank of Hungary will, in our view, deliver 100 basis points of cuts in rates of overnight tools which have been effectively shaping monetary policy since mid-October. The base rate should remain on hold for a while and we will hear more about prudence and gradualism, adding some hawkish taste to the easing.
Sweden: How the Riksbank has made the krona’s path to recovery even narrower (ING) - EUR/SEK is approaching the April highs, and this is not just a risk sentiment issue. The emergence of dissent within the Riksbank and lower-than-expected inflation figures are leaving the krona without a solid floor. Near-term vulnerabilities remain elevated, and our baseline scenario for a recovery in the second half of the year faces rising risks.
Japan
Japan flash PMI data awaited after GDP confirms survey data strength in first quarter (S&P Global) - Japan's first quarter official GDP data surprised to the upside, signalling a stronger than anticipated revival of economic growth. However, such a robust acceleration of growth had been signalled ahead by the PMI surveys, which correctly revealed a resurgence of consumer spending to have been the driving force behind the upturn.
Canada
BoC Financial System Review — Higher Rates are Working (BMO) - The Bank of Canada's Financial System Review (FSR) lays out some key vulnerabilities set against a backdrop of much higher interest rates across the developed world. Perhaps most pressing and timely are issues surrounding bank-sector stress and the state of the Canadian mortgage market.
Mexico
Mexico | Manufacturing moderates in April amid lower external demand (BBVA) - The BBVA Multidimensional Manufacturing Indicator (BBVA MMI) grew 0.8% in April (YoY), the same figure registered in March, and 1.6 pp below the average reported in 1Q23.
Banxico ends hiking cycle but will keep rates on hold for a while (BBVA) - With this decision, Banxico ended the fastest ever rate-hiking cycle, acknowledged that a "disinflationary phase is underway" but stated that it will keep the policy rate “at its current level for an extended period”.
Real Estate
Townhouse Construction Cools (NAHB) - According to NAHB analysis of the most recent Census data of Starts and Completions by Purpose and Design, during the first quarter of 2023, single-family attached starts totaled 29,000, which is 19% lower than the first quarter of 2022. Nonetheless, over the last four quarters, townhouse construction starts totaled a strong 141,000 homes, which is only 3% lower than the prior four-quarter period.
NAHB Debuts New Index for Multifamily Activity (NAHB) - The National Association of Home Builders (NAHB) redesigned its Multifamily Market Survey (MMS) in the first quarter of 2023 to make it easier to interpret and more similar to the NAHB/Wells Fargo Housing Market Index (HMI) for single-family housing. The MMS produces two separate indices. The Multifamily Production Index (MPI) had a reading of 50 for the first quarter while the Multifamily Occupancy Index (MOI) reading was 82.
Outlook
Rates Scenario for May 18, 2023 (BMO) - We expect Chair Powell will characterize this as a ‘conditional’ pause, indicating a willingness to raise rates further if inflation fails to improve sufficiently. This tightening bias would also be a signal that the Fed has no intention to cut rates anytime soon.
US economic outlook: May 2023 (EY Parthenon) - The US economy started the year on a soft note, with real GDP advancing a modest 1.1% in Q1, and while private sector domestic demand rose a solid 2.9% the sequential monthly momentum was soft. Reassuringly, high frequency data doesn’t point to a retrenchment in private sector activity, but instead confirms that a generalized slowdown is underway.
Research
The Returns to Government R&D: Evidence from U.S. Appropriations Shocks (Dallas Fed) - We estimate the causal impact of government-funded R&D on business-sector productivity growth. Identification is based on a novel narrative classification of all significant postwar changes in appropriations for R&D funded by five major federal agencies. Using long-horizon local projections and the narrative measures, we find that an increase in appropriations for nondefense R&D leads to increases in various measures of innovative activity, and higher productivity in the long run.
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