The COVID-19 virus continues to pose significant problems for western countries amid new mutations. Cases are rising in many European countries, notably Eastern Europe. Vaccines seems to be effective against the mutations however. On the vaccinations process, China this week said that it aims to have 40% of population vaccinated by end of July, while in the US Biden said that the US will have enough vaccine supply by the end of May to vaccinate all Americans. The European medical association will likely approve the Johnson and Johnson vaccine on Thursday.
The Euro area continues to be a two-speed economy at the moment. This week’s PMIs revealed that the manufacturing sectors continues to do well while the service sector activity is undermined by restrictions (restaurants, hotels etc). Notably the German and Italian manufacturing sectors showed strong signs, while Ireland, Spain and France saw the sharpest contraction. In China, focus next week will be on the Chinese government’s growth target and reform plans at the National People’s Congress.
The inflation print in the euro-area for February revealed no imminent surge in inflation pressures. Headline inflation came in at 0.88%, virtually unchanged from January while core inflation fell back by 0.31pp to 1.10% due to base effects falling out. Headline inflation could be boosted in the coming months from higher oil prices as Saudi Arabia did not appear ready to boost production at this week’s OPEC meeting.
US yields are still on the rise, spilling over to European yields: US 10 year Treasury yields jumped 7.5bp on Wednesday reaching 1.47%. Where inflation expectations by the end of last week took a hit due to higher real rates, real rates as well as inflation expectations both moved higher. On Thursday Federal Reserve Chair Jerome Powell said that the central bank is monitoring financial conditions, while adding that the economy is still a long way from achieving a full recovery from the Covid-19 pandemic and hence Fed tapering its support.
Next week’s ECB meeting will be very closely watched to see if the central bank is concerned the higher yields are tightening financing conditions in the euro-area to an extent it needs to intervene. We lean towards ECB concluding a continuation to monitor and remain short of conclude an unwarranted tightening. This may come at a later stage if conditions worsen ‘enough’ (for more see our preview).
On the political front, tensions are emerging between EU and UK over the Brexit deal. The two sides are arguing over whether the UK has breached the Northern Ireland protocol or not, as the UK unilaterally has decided not to check (in particular food) exports to Northern Ireland from Great Britain for another six months. We did not see a reaction to GBP but should keep in mind the free trade agreement has not been ratified by the European Parliament yet (although no one, at least at this point, believes that EP would dare to reject it). An imminent tightening of fiscal policies in Europe is not on the cards as EU is set to extend budget rules suspension through 2022. This week, the EU Commission says that it would be a mistake pulling back support too quickly and the best thing to do is to support the recovery by extending the suspension for another year.
