All eyes on Euro area inflation

In focus today

In the US, March ADP private sector employment and ISM Services are due for release. Yesterday's labour market data supported the notion of labour markets gradually becoming more balanced. Hence, it will be interesting to see if today's data corroborates this view.

In the euro area, today's focus is on euro area inflation for March. We expect inflation to come in at around 2.4% y/y which is slightly below the consensus forecast of 2.5% due to the recent downside surprises in the four biggest economies. Inflation is likely to decline due to falling food inflation and core goods. Service inflation is still sticky which means core inflation will likely tick down only marginally to 3.0% from 3.1% in February. The likely decline in inflation is good news for the ECB but the sticky underlying service inflation and uncertainty regarding high wage growth means we only foresee the first rate cut in June. The euro area unemployment rate for February is also released, which we expect remained stable at 6.4%, highlighting a continued strong labour market.

Economic and market news

What happened overnight

In China, similar to the NBS Services PMI, the Caixin Services PMI edged up to 52.7 in March, propelled by new business increasing at the fastest pace in three months. Coupled with the strong manufacturing PMIs of late, this supports the narrative of the Chinese economy gaining momentum in Q1.

In Taiwan, the island experienced its most powerful earthquake in nearly 25 years, leading to damaged buildings, the suspension of rail traffic, and the necessity to evacuate semiconductor manufacturing plants. Shares of Taiwan Semiconductor Manufacturing Co. were down 1.4% in early trade.

What happened yesterday

In the US, February JOLTS Job Openings came in very close to expectations at 8.76m (cons: 8.75m), while the January print was revised down to 8.75m. Supply of workers ticked higher in February, seeing the ratio of job openings to unemployed job seekers dropping to 1.36 from 1.43. While this is close to the lowest levels seen post-pandemic, it remains above pre-pandemic averages. Other indicators painted a bit of a mixed picture, as involuntary layoffs ticked somewhat higher, though from a low level, while hiring also was slightly higher despite weaker signals from leading surveys such as the NFIB. Bottom line, yesterday's data releases broadly support the narrative of labour markets gradually balancing.

Moreover, Fed's Mester (voting member) was on the wire, stating that she still believes the Fed is on track to cut rates this year but underscored the necessity for more data before confirming such a move is possible. Fed's Daly (voting member) also made public remarks, noting that three rate cuts this year are a "very reasonable" baseline, though nothing is guaranteed.

In the euro area, Banca d'Italia's nowcast model, EuroCOIN, which estimates quarterly growth in the euro area, rose markedly in March, turning positive for the first time since February 2023. This raises questions about the pace of cuts following June.

German HICP inflation declined slightly more than expected in March to 2.32% y/y from 2.74% in February. The decline was driven by lower food, core goods and energy. German core CPI declined to 3.25% in March from 3.37%, while core services inflation rose once again to 3.7%. Hence, service inflation is still sticky in Germany, but this was somewhat expected due to the timing of Easter. The seasonally adjusted series show core inflation at 0.16% m/m s.a. as service inflation was 0.29% m/m s.a.

In commodities, brent crude briefly crossed the USD89/bbl mark as oil supply faced pressure due to Ukrainian attacks on Russian energy facilities, along with escalating tensions in the Middle East, while demand is supported by stronger global growth expectations. Moreover, OPEC+ is scheduled to convene today, though Reuters suggests that any recommendations for oil output policy changes at the meeting are unlikely.

Equities: Global equities were down for the second day in a row as the "overheating" fear took over. With manufacturing outlook improving, oil and commodity prices rising, the higher-for-longer narrative is challenged by a too hot economy that will keep central banks sidelined, and the tight policy will continue. This looks very much like the situation we had in most of Q3 last year. For equities this means energy and materials are the relative winners while long duration growth stocks and small caps are suffering. In US yesterday, Dow -1.0%, S&P 500 -0.7%, Nasdaq -1.0% and Russell 2000 -1.80%. Asian markets are broadly lower this morning and the same goes for European and US futures.       

FI: The main event in the European markets today is the release of the European inflation data for February, where we expect to see a decline after a string of national inflation data came in modestly lower than the consensus forecast. The slight decline in the national inflation data including Germany had limited impact on the European yields and rates yesterday, where 10Y German government bond yields ended some 10bp higher relative to the level before Easter. However, much of the impact came from the 10Y Treasury yield that has risen some 15bp relative to level before Easter due to the stronger than expected ISM data released on Monday.

The stronger US data have dampened the rate cut expectations in the US and again the markets are looking towards "higher for longer" regarding monetary policy. Two Fed Officials said yesterday that they still expect three rates cuts in 2024. We have more speeches from Federal Reserve officials today including Fed Chairman Powell as well as the ISM service data ahead of the labour market report on Friday.

FX: Oil prices continue to climb higher and yesterday Brent crude rose to the highest level since October last year, which also contributed to sending NOK FX higher despite the sour risk sentiment. The broadly stronger USD over Easter retreated slightly in yesterday's session, with EUR/USD hovering around 1.0750. Today, focus turns to euro area inflation data with inflation data from Germany out yesterday pointing to a print below the consensus expectation. CHF continues to trade on the backfoot in line with our expectation after the SNB initiated its cutting cycle in March.