Market movers today
In the euro area, focus remains on inflation with the release of the aggregate figure. We expect headline inflation decline to 1.6% in March, from 2.0% in February, driven partly by a fall in core inflation from 0.9% to 0.7%. If this core inflation figure is correct, it will be the lowest since April 2016. However, our estimate of a decline is due mainly to the early timing of Easter in 2016, causing low inflation in volatile package holiday prices in March this year. Added to the lower core inflation, the latest decline in the oil price together with less support from base effects in energy prices is also likely to have driven headline inflation lower, although energy price inflation should still have a considerable positive contribution to inflation. Finally, food price inflation has surprised on the upside recently, due mainly to cold weather in the winter months, but should not have continued and we look for a lower contribution in March.
US PCE core inflation for February is also due for release today. While headline inflation has been increasing rapidly and is almost at the Fed’s 2% target, PCE core inflation has remained stuck around 1.7%. We expect the development of PCE core inflation to attract special interest in coming months given the comments at the last FOMC meeting that the Fed has a ‘symmetric inflation target’, which could be interpreted as the Fed will be willing to let inflation slightly overshoot the 2% target. Hence, it implies a more dovish tone. However, we will have to see whether it actually means it. Last time PCE inflation was at 2% was at the beginning of 2012. We estimate the PCE core increased 0.2% m/m, implying 1.7% y/y. Thus, we expect core inflation to remain at the same level it has stayed at since August 2016.
In Scandi markets, we expect focus to be on Norwegian unemployment, together with the government’s presentation of its Perspectives 2017 report. The Swedish wage negotiating process will also be followed closely before the current contracts run out (midnight) see more on page 2.
Selected market news
The Chinese official manufacturing PMI increased to 51.8 in March, from 51.6 in February, and is now at the highest level since 2012. Despite the continued improvement in the first few months of 2017, we believe the Chinese economy will be faced with some moderate headwinds this year, as we expect the housing market to cool and believe the significant infrastructure boost is set to fade. China has moved its foot from the gas to the brake and aims to rein in the brewing housing bubble and lean against inflationary pressure.
Asian stocks are mixed this morning but Chinese stocks have been supported by the economic figures and the Shanghai composite index added 0.3% on the last day of the month and quarter.
Despite the quarter-end there is nowhere the same stress in the European system as seen around year-end. It is likely that this move towards a more ‘normal repo situation’ could weigh on the short-end of the German yield curve over the next couple of days.
