EU Inflation in focus ahead of this week’s ECB
In a week that will see a plethora of important economic data announcements in the Europe and US, markets look set to start off on the front foot today as we close the first quarter of 2014, with important PMI data due tomorrow, and another important US employment report due on Friday.
Last week saw another strong week for European markets, with the EuroStoxx50 back near its highs for this year, and close to six year highs prompted in no small part by expectations of further stimulus measures from Chinese authorities and the ECB, as they look to combat a growth slowdown, and a rising deflationary threat.
All the more surprising last week was a potentially significant softening of position from Jens Weidmann, President of the German Bundesbank, about the prospects of further policy easing by the ECB in the form of QE, to counter a potential deflationary threat in the euro area.
These expectations are even more significant given the belief that the Federal Reserve remains committed to the ending of its current stimulus by the end of this year. This has fuelled an unrealistic expectation that we could well see the ECB, along with Chinese authorities look to fill the gap, with markets looking with keen interest at this week’s ECB rate meeting.
This belief seems premature, despite the weight of Mr Weidmann’s comments and the apparent change of tone given the Bundesbank’s considerable and consistent opposition to any such extraordinary measures over the past four years of the crisis in Europe.
The fact is significant constitutional obstacles remain to these types of measure in Germany, and it seems more likely last week’s comments were merely the latest in a long line of attempts to try and jawbone the euro lower, more than anything else more substantive.
In this case we have seen the euro weaken a little, ahead of this week’s ECB rate meeting, but it would be a big surprise if the ECB were to act in a substantive way this week, particularly in light of last month’s economic assessment of conditions in the euro area, which pointed to below target inflation, but no deflation threat, a stance reiterated by ECB President Draghi last week, where he once again compared the euro area to an “island of stability.”
This doesn’t sound like someone about to embark on further easing measures, particularly given that recent economic data continues to encourage, deflation concerns notwithstanding.
Furthermore, any action this week would be tantamount to admitting that the newly announced latest growth and inflation forecasts, announced in March are completely wrong.
Today’s latest EU CPI inflation numbers for March could well increase the pressure further on the ECB this week when they are released later this morning with expectations of a small fall to 0.6%, from 0.7%. Core prices are also set to weaken slightly from 1% to 0.8%.
In the UK the latest lending figures for February are expected to show a slight decrease in mortgage approvals and a slight increase in net lending.
Concerns remain about how balanced the recent economic revival is in the context of consumer spending. These latest numbers could reinforce the belief that the current rebound is being fuelled by cheap lending, particularly in the housing market.
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