Regional Prints Reveal Stickiness in Core Inflation

In focus today

In the euro area we will get the HICP print for February. With the regional data we got yesterday (see more below) we will probably see HICP come in at 2.5% y/y or 2.6% y/y, down from 2.8% in January. That is a little higher than the 2.4% we first expected before yesterday’s releases. Core inflation showed signs of stickiness, meaning that taking yesterday’s releases into account the core inflation print will probably decrease to 2.9% or 3.0% from 3.3% in February.

In the US, today’s main data release will be the ISM Manufacturing index for February. Consensus expects a further increase to 49.5 (from 49.1) following a modest uptick in the flash PMIs. We will also have a range of Fed speakers on the wires today, including a Waller, Logan, Bostic, Daly and Kugler. We also get the University of Michigan consumer sentiment indicator.

February PMIs are released in several countries today, including Sweden. The new order-to-inventory spread in Sweden has seen a clear upward shift over the past six months, which at least historically has been a rather reliable go-ahead signal for production to increase. Whether or not this shows up in today’s data remains to be seen, but it should not be far off in any case.

Economic and market news

What happened overnight

In China, PMI numbers were released. We continue to see divergence between the NBS survey and the private Caixin survey. According to the NBS survey, the manufacturing industry slowed marginally from 49.2 in January to 49.1 in February, meaning that according to this figure the Chinese manufacturing sector saw slowing activity for the fifth month straight. However, the Caixin survey showed that the manufacturing sector expanded even more than it did in January, from 50.6 to 50.9 in February. The service PMI got a lift from 50.7 in January to 51.4 in February.

In Japan, BoJ governor Ueda said that he thinks it is too early to declare that the 2% inflation target has been met yet. He said that he would await the results of companies’ wage negotiations with unions later in March before being able to be say that the goal has been met. Ueda’s statement contradicted the statement from BoJ’s Takada yesterday, which was hawkish and fuelled speculations over an impending end to negative rates. We believe that this will happen in April.

What happened yesterday

In the US, we got January PCE inflation data. Core inflation (the Fed’s preferred measure for underlying inflation) was in line with expectations (+0.4%) but real consumption volumes were on the weaker side (-0.1% m/m) amid a small uptick in savings rate (3.8%; from 3.7%). Following the release, bond yields turned lower, and the broad USD weakened.

We also got jobless claims. The continued claims unexpectedly rose to the highest level since November which sends a signal of a cooling job market as job seekers take longer to find new employment. Initial jobless claims were still moderate at 215,000, which was a little higher than market expectations.

The Fed’s Daly said central bank officials are ready to lower interest rates as needed – but emphasized there is no urgent need given the strength of the economy. Bostic reiterated his view that it will probably be appropriate to begin easing policy this summer. Fed’s Mester said that PCE inflation data shows that Fed still has work to do, and three rate cuts in 2024 seems about right.

In the euro area we got local inflation data from the euro countries. French inflation was marginally higher than expected. CPI rose to 2.9% y/y in February (cons: 2.8%, prior: 3.1%). In Spain CPI inflation was as expected, but the HICP inflation was marginally higher than expected due to different weighting in the two methods. The monthly increase in seasonally adjusted core inflation was to the high side at 0.33% m/m s.a. German inflation declined in January, but core was unchanged. The monthly change in core inflation was to the high side due to service inflation that increased 0.37% m/m s.a. Hence, both Spain, Germany, and France signal that the most recent underlying momentum in core inflation is to the high side due to services.

ECB’s Panetta sounded dovish by saying that inflation is falling faster than expected.

Equities: Global equities rose to a new all-time high yesterday. Cyclicals outperformed as the storm of macro data boosted the “higher-for-longer” environment. Higher-for-longer can both be a demand and an inflation driver, and yesterday it was a bit of both which also meaning the inflation did come in slightly worrisome. Banks, which are in our opinion the biggest winners from the current mix of incoming data did okay yesterday, but we must admit investors prefer growth stocks on days when risk appetite is improving. In US yesterday, Dow +0.1%, S&P 500 +0.5%, Nasdaq +0.9% and Russell 2000 +0.7%. Asian markets are higher this morning with a sharp lift to Japanese equities. European futures have also seen solid gains while US futures are showing more moderate lifts.

FI: A string of strong core inflation prints from Germany, France and Spain drove European yields higher in the first part of yesterday’s trading session. However, this trend was offset in the afternoon following the release of weak US consumption figures for January and the slightly higher US claims figures for the past weeks. The German yield curve bull-flattened with 10Y Bund yields down by 5bp throughout the day, while the US Treasury curve was less changed. This highlights the strong impact of US data on long-end EGB yields at present. The Bund ASW-spread continued drifting lower through the session, reaching the lowest level at 35.3 since the summer 2021.

FX: Yesterday’s session was characterized by broad USD appreciation in the G10 space except against the JPY. EUR/USD drifted lower towards 1.08. The JPY strengthened yesterday on hawkish remarks from BoJ member Hajime Takata, but this morning, BoJ governor Ueda signalled a more dovish stance, saying that the “stable price target is not yet in sight,” sending USD/JPY back above 150.