Euroarea inflation to climb back to positive territory

Market movers today

• Yesterday’s German inflation data were in line with our expectations and hence we have not changed our view that preliminary inflation data for the euro area as a whole, due for release today, will show that the euro area edged out of deflation in April. We expect HICP inflation to increase to +0.1% y/y in April from -0.1% y/y in March, mainly on the back of a less negative contribution from energy prices but core inflation is also expected to have edged slightly higher. The unemployment rate should have continued its downward trend to the lowest level since April 2012.

• In the US the private consumption deflator (PCE) for March and the employment cost index for Q1 will be released. They deserve attention as they are Fed’s preferred measure for inflation and wage costs. Monthly data on average hourly earnings have shown a flat trend in wage inflation in recent months but we believe that a pick-up in wage growth is imminent. We expect both core and headline PCE inflation to increase 0.2% m/m in March mirroring the development in the CPI data.

• In the US we expect growth in personal spending to rebound slightly to 0.3% m/m in March reflecting the modest rebound in retail sales. Personal spending in March has already been incorporated in the first estimate for private consumption in Q1 and as private consumption was close to expectation, there will be no major surprise.

• In Norway and Denmark unemployment figures are due for release today.

Selected market news

The FOMC statement released yesterday did not change our expectations that the Fed will deliver a first 25bp rate hike in September this year. The statement was basically unchanged in the forward-looking paragraph, whereas the latest developments were described as downbeat, partly reflecting transitory factors. Hence, in our view, the FOMC remains on track to hike rates this year, conditional on a rebound in GDP growth in the current quarter and employment, which accelerates to an above 200K per month average in coming months.

In line with expectations Bank of Japan remained on hold this morning. As usual there was one dissenter but this time he proposed to cut the target for the expansion of the monetary base, which was perceived as slightly hawkish. The new economic forecast will be released later this morning and we expect both growth and inflation to be revised slightly lower. It is still our view that BoJ will not announce further easing in 2015.

As expected, the Reserve Bank of New Zealand kept rates unchanged. Governor Stevens opened a door for a future rate cut and it was reiterated that the NZD’s level is ‘unjustifiable and unsustainable’ which in the past has been a criteria for FX intervention.

Greece and the euro area institutions are set to step up negotiations today. The aim is to reach a preliminary deal on Sunday, which would be signed off by the finance ministers at the next scheduled Eurogroup meeting on 11 May.