The Japan Services Producer Price Index (SPPI) growth rate keeps above 2%  in July, as reported on August 27. According to the Bank of Japan, the SPPI increased by 2.8% year-on-year in July, slightly lower than the 3.1% recorded in the previous month, but the overall upward trend remains unchanged.

The primary driver of this increase was accommodation services, which experienced a year-on-year growth rate of 13.5%, contributing 1.35 percentage points to the overall SPPI increase. Other contributors included transportation, information and communications, and advertising services, which added 0.44, 0.33, and 0.24 percentage points, respectively.

Since early 2021, the SPPI year-on-year growth rate has been steadily rising, reflecting the ongoing increase in labor costs within Japan’s service sector. The Bank of Japan recently released two reports expressing concerns about wage growth and service inflation, leading the market to anticipate that the Bank of Japan may still implement another rate hike this year to curb the growth of service inflation.

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China’s industrial profits continued to rise in July, as reported on August 27. According to  the National Bureau of Statistics, the cumulative year-on-year growth rate of profits for large-scale industrial enterprises reached 3.6% from January to July, an increase of 0.1% compared to the January to June period. The year-on-year growth rate for July alone was 4.1%, up 0.5 percentage points from June, marking the second consecutive month of accelerated growth.

This recovery was primarily driven by the high-tech manufacturing sector, which saw a profit growth rate of 12.8%, contributing over 60% to the overall growth. This reflects the Chinese government’s support for high-tech, high-efficiency, and high-quality products.

However, in a recent statement, Yu Wei Ning, an industrial statistician at the National Bureau of Statistics, pointed out that domestic consumer demand remains weak, which has compressed the profits of some industrial enterprises. This situation is also reflected in the July Producer Price Index (PPI), which declined by 0.8%, marking the 22nd consecutive month of negative growth in PPI.

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The Japanese Ministry of Internal Affairs and Communications (MIC) released the consumer price data on August 22, showing that the July CPI increased by 2.8% year-over-year, the same as the previous month, and slightly above market expectations by 0.1%.

This sustained growth was mainly due to a significant rise in electricity and gas prices, which drove energy prices up by 12.0% (compared to 7.7% the previous month). However, the year-over-year increase in fresh food prices fell to 4.2% (down from 8.2% the previous month), offsetting some of the overall increase.

The core CPI, which excludes fresh food, increased by 2.7% year-over-year, slightly higher than the previous month’s 2.6%, marking the 28th consecutive month above the Bank of Japan’s 2% inflation target. Further excluding energy, the double core CPI rose by 1.9%, down by 0.3% from the previous month, marking the first time it has fallen below 2% since September 2022.

At the end of July, the Bank of Japan unexpectedly raised interest rates by 15 basis points, causing significant market volatility. Subsequently, the Bank of Japan Governor stated that there would be no rate hikes during periods of market instability. However, according to the latest Shunto negotiations, Japanese wages saw the largest increase in 33 years (5.33%).

Simultaneously, on August 20, the Bank of Japan published two reports on the impact of demographic changes on wage structures and the impact of service inflation on overall CPI.

This appears to signal that the Bank of Japan may continue to raise rates in response to the persistence of service inflation. The market currently expects the Bank of Japan to maintain rates unchanged in September but anticipates another rate hike before the end of the year.

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The U.S. Department of Labor released the unemployment insurance weekly claims report on August 22. Initial claims for unemployment benefits for the previous week were 232,000, an increase of 4,000 from the revised figure of the prior week. The four-week moving average was 236,000, a decrease of 750 from the revised figure of the previous week. The number of continuing claims for unemployment benefits rose by 4,000 to 1,863,000, nearing the highs last seen in November 2021.

Overall, the upward trend in initial unemployment claims has not yet changed. In the minutes of the July FOMC meeting, Federal Reserve officials clearly indicated that initial claims for unemployment benefits are a key indicator for monitoring the labor market (Regarding the outlook for the labor market, participants discussed various indicators of layoffs, including initial claims for unemployment benefits and measures of job separations.). Therefore, it remains crucial to closely monitor any significant changes in the trend of unemployment claims.

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The Federal Reserve released the minutes of the July FOMC meeting on August 21, providing insight into the views of Fed officials on the current economic conditions and outlook:

Inflation: Inflation has eased compared to a year ago, with core PCE rising 2.6% year-over-year in June. Although still above the Fed’s 2% target, recent data have given Fed officials confidence that inflation is on track to reach the target, supported by factors such as slowing economic growth, weakened pricing power among businesses, and reduced household savings. Many officials noted that as the labor market rebalances, wage growth has continued to slow, which should further translate into a decline in core non-housing services inflation. Some officials also noted that the decline in new tenant rents is likely to have a delayed impact on housing services inflation, leading to the continuous moderation of housing services inflation

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Employment: The labor market is currently strong but not overheating. While the unemployment rate has been rising slightly since April, it remains at historically low levels. Some officials believe that job growth may be overestimated, as several officials pointed out that various indicators suggest the labor market is continuing to slow, with declines in hiring rates and job openings. Others also indicated that the rebalancing of the labor market has been partly supported by an increase in labor supply, particularly due to rising labor force participation rates among those aged 25 to 54 and an increase in immigration.

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Policy Outlook: With inflation continuing to decline, most officials believe that if inflation continues to fall as expected, it would be reasonable to consider easing monetary policy at the next meeting. Many officials see increasing risks to the employment target, warning that if the labor market slows further, it could lead to more significant deterioration. All officials agreed on the necessity of rebalancing and closely monitoring the risks associated with the dual mandate of price stability and maximum employment.

Overall, with inflation steadily decreasing and potential risks of labor market deterioration, the Fed has signaled a leaning toward a rate cut in September. Additionally, the U.S. Bureau of Labor Statistics on August 21 revised down the nonfarm payrolls by 818,000 from April 2023 to March 2024, meaning that the average monthly nonfarm payroll increase for this period will be revised down from 242,000 to 174,000, confirming the possibility that employment growth had been overstated. The market currently expects a total of 100 basis points in rate cuts throughout 2024 (25 basis points in September, 50 basis points in November, and 25 basis points in December).

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(Photo Credit: Federal Reserve)