A look at the day ahead in European and global markets from Wayne Cole
It's all about
inflation this week with markets pricing in upside risk for the core U.S.
reading, and a downside chance for European and Japanese consumer prices.
The Federal
Reserve's favoured core measure of personal consumption expenditures (PCE)
prices is forecast to rise 0.4%, with a risk of 0.5% m/m, when it wasn't that
long ago markets had been hoping for a nice tame 0.2% increase.
Some of this is
the "January effect" which sees prices for many goods and services
rise at the start of the year, notably for healthcare. The bull run on Wall
Street will also play a part by pushing up the cost of portfolio management.
Indeed, the
core services ex-housing PCE measure, which Fed members like to reference,
could well rise 0.6% m/m for the biggest gain since December 2021.
The six-month
annualised pace could thus climb to around 2.5%, after two months of running
just below 2%, which is a major reason the market has pushed out the expected
timing of the first Fed rate cut to June from May.
There are at
least 10 Fed speakers out this week, including the influential New York Fed
chief John Williams, while Chair Powell gives his Senate testimony on March 7.
The headline
CPI for the European Union on Friday is seen slowing to 2.5% from 2.8%, with
the core at 2.9% versus 3.3%. That will almost certainly lead the ECB to lower
its inflation forecasts at its March meeting, although the market sees almost
no chance of a rate cut then. Futures probability is around one-in-three for an
April easing, and almost fully priced for June.
Inflation
reports from Germany, France and Spain out on Thursday will serve as an
appetiser for the main feast.
Japan's CPI is out on Tuesday and is forecast to slow to an
annual 1.8%, from 2.3% in December, although the core core measure is seen at
3.3% and still above the Bank of Japan's 2% target.
Such a slowdown in inflation would seem to argue against a
policy tightening, yet BOJ officials have been putting more weight on rising
wages, leading markets to wager it will lift rates to zero in March or April
from the current -0.1%.
The Treasury market also faces a tough week of new supply
with $127 billion of two- and five-year notes due later on Monday, and another
$42 billion in seven-year paper due on Tuesday. [US/]
And there is a non-trivial risk some U.S. government
agencies could be shut down if Congress cannot agree on a borrowing extension
by Friday.
Friday brings the release of the February China PMI, where
analysts are tipping a slight improvement to 49.5, while the U.S. ISM survey of
manufacturing is also forecast to rise to 49.5.
Key developments that could influence markets on Monday:
- UK CBI Distributive Trades for Feb
- Bank of England Deputy Governor Sarah Breeden and chief economist Huw Pill speak
- Participation by ECB president Christine Lagarde in plenary debate on the ECB Annual Report
- Fed Bank of Kansas City President Jeffrey Schmid speaks on the economic and monetary policy outlook