Euro area HICP inflation to increase to -0.2%

Market movers today

• In the euro area the preliminary German consumer prices released Friday suggest that deflation in the euro area eased more than the current consensus expectations in February. We expect euro area HICP inflation to increase to -0.2% y/y (consensus: - 0.4% y/y) from -0.6% y/y in January mainly on the back of the rebound in the crude oil price in the past month. As usual core inflation deserves particular attention for possible second-round effects from the decline in the crude oil price and headline inflation.

• Across Europe there will be focus on manufacturing PMIs. Most interesting will be the first estimates for Italy and Spain. In the UK we expect a slight decline but it should be remembered that the service PMI scheduled for release on Wednesday is more important and there we expect to see a slight improvement.

• In the US the main event is the manufacturing ISM for February. The regional manufacturing surveys for February have been on the soft side, so we expect to see a slight decline. There will also be considerable focus on the core PCE-inflation measure (Fed’s preferred measure) for January after the larger than expected increase in CPI core. We expect the increase in core PCE to accelerate in January but it is too early to call a reversal of the downward trend in core inflation.

• Looking further ahead the most important events this week are the ECB meeting on Thursday and the US labour market report for February on Friday

• We look for a decline in Norwegian PMI. For more on Scandi markets see page 2.

Selected market news

The People’s Bank of China cut the benchmark one-year lending rate by 25bp to 5.35% and the one-year benchmark deposit rate by the same amount to 2.5% on Saturday citing low inflation as the reason for easing policy. The move came ahead of the release of the official manufacturing PMI, which improved slightly to 49.9 from 49.8 in January but continues to show contraction in the manufacturing sector. The details in the survey were more positive though, and we still expect the Chinese PMIs to move moderately higher in coming months, supported by modest monetary easing, stabilisation of the property market and resilient exports. Asian stock markets have in general cheered the move from the PBoC and most indices are higher this morning.

EUR/USD continued lower after European close on Friday. This came despite an extraordinary weak Chicago PMI, which put downward pressure on US treasury yields late Friday.

Comments from Fed Vice Chair Fischer Friday confirmed that the timing of the first rate hike and the following path for the Fed funds rate will be data-dependent. We expect the US labour market to be strong enough to convince the Fed to hike in June but with the risk of a later lift-off, as we expect core inflation to move lower over the coming months.