Core eurozone inflation rises as stimulus takes effect

• Further BoJ stimulus more likely;

• Core eurozone inflation rises as stimulus takes effect;

• US inflation, income and spending in focus as we near the end of the week.

Another busy day of economic releases has provided the catalyst for further gains in equity markets on Friday, as Japanese data opens the door another notch to more quantitative easing, while the eurozone inflation reading would appear to suggest that the deflation threat is not as serious as previously thought.

Another round of stimulus from the Bank of Japan has widely been expected ever since the central bank announced its initial program of quantitative and qualitative easing in April 2013. Only in recent months have people seriously started to question whether another round of stimulus would be necessary as the country appeared to be nearing its 2% inflation target – once you remove the 2% that is attributed to the sales tax hike – and was coping better than anticipated with the sales tax hike.

The data released overnight would suggest things aren’t as rosy as initially thought as industrial production fell well short of expectations, unemployment unexpectedly rose and inflation fell to 3.4%, giving an effective rate of 1.4% once the 2% attributed to the sales tax hike is removed. This is still well below the 2% target, which may prompt discussions within the BoJ about whether more needs to be done. I don’t expect anything to happen in the next couple of months as they’ll probably want to see further evidence that inflation has hit a ceiling around the 1.4% level, but we could see something later this year.

This has also been a key talking point in the eurozone, where the ECB, like its Japanese counterpart, is currently battling with very low inflation and in some areas, even deflation. This is a slippery slope, as Japan knows all too well, and until now the ECB has played a very dangerous game in allowing it to happen in an attempt to allow the countries to regain competitiveness.

That said, the inflation figures for August would suggest the stimulus package announced by the ECB a few months ago is having an impact. While the overall inflation reading was 0.3% for the month, core inflation was 0.9% which suggests the inflation problem is abating and the only thing driving the main CPI reading lower is temporary volatile factors such as fuel prices. Given the number of stimulus measures announced by the ECB a few months ago, it’s difficult to know what exactly is helping lift the inflation number but I imagine the more than eight cent drop in the euro against the dollar, from $1.40 to below $1.32, is contributing.

Staying on the topic of inflation, we’ll get some important data from the US shortly before the open in the form of the core personal consumption expenditure price index. This is the Fed’s preferred measure of inflation and currently lies at 1.6%, which allows the central bank to remain accommodative for now, but if this number starts to climb as the economic recovery goes from strength to strength, pressure will grow on the Fed to pay attention to the other aspect of its dual mandate, price stability, and raise rates.

We’ll also get some income and spending figures, which is something the Fed is closely monitoring at the moment, as well as the UoM consumer sentiment reading. With all this data to come, we could be in for a fairly volatile end to the week.

Ahead of the US open, the S&P is seen 4 points higher, the Dow 29 points higher and the Nasdaq 10 points higher.