Why central bankers won’t leap into action, as inflation remains sticky and FTSE 100 underperformance leaves it as the wall flower of the global equity market
The focus is back on macro data this week, and ‘inflation Thursday’ is highlighting how difficult it will be for central bankers to meet their 2% inflation target. European CPI data is in focus early on Thursday, ahead of US PCE that is released at 1330 GMT. These are the last inflation readings for the currency bloc before next week’s ECB meeting, where the central bank is expected to keep interest rates on pause at 4%. Expectations of an April rate cut from the ECB had been penciled in for April, however, they have now been scaled back, and the first rate cut is not expected until June. There are currently 92 basis points of interest rate cuts priced in for the currency bloc.
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This number is important to remember in the coming week, as a subtle shift in rhetoric from the ECB, calling for patience when it comes to rate cuts, could move expectations of the first ECB rate cut into the second half of the year. If this happens then it may boost the euro. Already, the stronger national CPI readings from Spain and France have pushed the euro higher by a notch. EUR/USD is erasing some of Wednesday’s losses and is making another attempt at $1.0850. EUR/USD has been weakening this month; however, the euro has been one of stronger performers in G10 FX space in February, and has risen by more than 2% vs. the yen and the Swissie, EUR/GBP also managed to claw back some losses and rose by 0.36%. Whether or not the euro can continue to recover vs the USD will depend on what signals the ECB sends at their meeting next month.
Spanish CPI takes its time to get to 2%, as French data is mixed
Spanish CPI, which is considered a lead indicator for the currency bloc, has risen faster than expected for February, with the annual core rate of CPI falling to 3.4% from 3.6% in January, but higher than the 3.3% expected by analysts. The headline rate fell to 2.9%, the lowest rate since August 2023, but it is still higher than the 2.8% expected. In France, data on Thursday was mixed. GDP for Q4 was higher than expected, rising by a mere 0.1% vs. 0% expected, however, consumer spending fell by 0.3% in January. CPI data has also fallen in France. The EU harmonized annual CPI rate was 3.1% this month, down from 3.4% in January, however, the monthly CPI rate surged by 0.9%, which is the highest monthly increase since March 2023. Monthly trends in inflation are worth watching closely, and this large surge is likely to be one reason why the ECB will take a cautious stance when it comes to inflation next week.
Germany: monthly CPI trends suggest a reacceleration in inflation pressure
In Germany, retail sales failed to bounce back in January, as expected, and instead fell 0.4%, unemployment also unexpectedly rose by 11k, more than the 5k expected for this month, which suggests that economic weakness in Europe’s largest economy, may start to weigh on the unemployment rate. German regional inflation is also following the trend set by Spain and France and is coming in hotter on a monthly basis, while annual rates are moderating as expected. We think that the monthly rate of inflation will be more important to the ECB at this stage, rather than the annual rate, as it shows the near-term inflation pressures in the economies of the currency bloc. This morning’s data shows that near term inflation pressure is strong, which is not compatible with rate cuts. This may force the ECB to take a less dovish and even cautious tone at next week’s meeting.
Fed speak remains cautious on US interest rate path
New York Fed President John Williams said that there was a way to go before the US inflation rate would reach the Fed’s target rate of 2%. He also pointed to the stronger than expected January reading of inflation as a sign that there would be ‘bumps along the way’ when it comes to bringing inflation back to target. Raphael Bostic, the head of the Atlanta Fed, said that he expects a rate cut sometime this summer, however, he also said that the Fed would always be data dependent. This is why the PCE data is worth watching closely this afternoon. Bostic is considered a dove at the Federal Reserve, however, even he said that the evidence suggests that this will not be a ‘fast march’ to the 2% inflation target.
Overall, Fed speak and economic data so far this week, suggest that 1, central bankers remain data-dependent, which raises volatility around key economic data releases. 2, inflation seems to be reaccelerating in the short term, which may make it harder to reach the 2% inflation goal.
FTSE 100: the wall flower of the global equity market
The prospect of a delay to rate cuts has not tempered stock market performance this month. The Eurostoxx index is higher by more than 5.6%, and has outperformed the S&P 500, which is higher by 4.6% in the past month, the Nasdaq is up by 5.17%. The FTSE 100 is virtually flat, as it becomes a wallflower in the global equity market, even BOE governor Andrew Bailey has been notably more dovish than some of his central banker peers.
Chinese shares have also been a big outperformer in February, with the CSI 300 rising nearly 9% this month, and the Hang Seng up 6.51%. China’s stock market recovery has been a reaction to some policy responses from Beijing in an effort to shore up the stock market as the economy continues to underperform. Looking ahead, the National People’s Congress on March 5th could keep upward pressure on Chinese equities, as analysts expect some economic measures to be announced that will hopefully boost China’s sluggish economy.
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