Inflation concerns are dominating market sentiment this week, with expectations diverging across major economies. Here’s a detailed look at what to expect in European and global markets:
United States: The focus remains on the Federal Reserve’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) prices. Markets anticipate a potential upside surprise, with forecasts indicating a 0.4% increase, possibly reaching 0.5% month-on-month. This contrasts with previous hopes for a more subdued 0.2% rise. The uptick in prices is attributed partly to the “January effect,” with various goods and services experiencing seasonal increases, notably in healthcare. Additionally, the bull market on Wall Street is exerting upward pressure on portfolio management costs, contributing to inflationary pressures.
Market attention is also on the core services ex-housing PCE measure, expected to record a significant 0.6% month-on-month increase, the highest since December 2021. This could push the six-month annualized pace to around 2.5%, prompting a revision in market expectations for the timing of the first Fed rate hike, now projected for June instead of May. Investors will closely monitor speeches by Fed officials throughout the week, including New York Fed Chief John Williams, with Chair Powell’s Senate testimony scheduled for March 7.
European Union: The headline Consumer Price Index (CPI) for the European Union is forecast to decelerate to 2.5% from 2.8%, with the core CPI moderating to 2.9% from 3.3%. This is likely to prompt the European Central Bank (ECB) to revise its inflation forecasts downward at its March meeting. However, markets anticipate minimal chances of a rate cut at this juncture, with futures pricing suggesting potential easing in April and June.
Inflation data releases from Germany, France, and Spain on Thursday will provide further insights into the inflationary landscape in the Eurozone.
Japan: Japan’s CPI data, scheduled for release on Tuesday, is expected to show a slowdown in annual inflation to 1.8% from 2.3% in December, although the core measure is projected to remain above the Bank of Japan’s 2% target at 3.3%. Despite easing inflationary pressures, the focus remains on rising wages, potentially prompting the Bank of Japan (BOJ) to adjust its policy stance. Market expectations point to a move to lift rates to zero from the current -0.1% in March or April, emphasizing the central bank’s emphasis on wage dynamics.
Other Developments: The Treasury market faces a challenging week ahead with substantial new supply of two- and five-year notes on Monday, followed by seven-year paper on Tuesday. Moreover, there’s a risk of partial U.S. government shutdown if Congress fails to agree on a borrowing extension by Friday.
Key market-moving events on Monday include the UK CBI Distributive Trades report for February, speeches by Bank of England Deputy Governor Sarah Breeden and Chief Economist Huw Pill, ECB President Christine Lagarde’s participation in a plenary debate, and remarks by Fed Bank of Kansas City President Jeffrey Schmid on economic and monetary policy outlook.
As markets brace for potential inflationary pressures and navigate evolving central bank policies, investors remain vigilant for key economic indicators and policy signals that could impact market dynamics.
