Overview: Inflation drivers continue to paint a mixed picture but inflation is likely to head lower through 2023 in US and the euro area. Price pressures from food, freight and energy have clearly eased. Labour markets remain tight, and while wage pressures have showed tentative signs of easing, underlying price pressures remain sticky. Especially the services sector drove upside surprises in the February core inflation prints. Despite the uncertainty around financial stability risks, we expect both the ECB and the Fed to continue hiking interest rates in the spring meetings.
Inflation expectations: Both US and euro area consumer inflation expectations have remained elevated, but off the peak levels. Markets' short-term expectations declined temporarily amid the SVB uncertainty but longer-term expectations remain stable.
US: US February CPI came out close to expectations (0.37%; forecast 0.4%), but core CPI surprised modestly to the upside (0.45% m/m; forecast 0.4%) driven by faster services inflation. While the shelter component explained part of the uptick, broader core services ex. shelter & healthcare picked to 0.8% m/m (from 0.65%). And even though core goods and energy CPI declined slightly, Fed is more focused on the stickier components of inflation, which still remain elevated. On a more positive note, average hourly earnings growth continued to ease to 0.24% m/m amid signs of recovering labour supply. That said, the still very high labour demand suggests that wage inflation pressures have not yet fully subsided.
Euro: Headline inflation continued to ease for a fourth month to 8.5% in February on the back of lower energy prices, but with core inflation coming in red hot and marking yet another record high at 5.6%. Declining input and producer prices suggest a peak in core inflation should not be too far off, but with the economy and labour market holding up better than expected, 'stickily' high core inflation will remain a worry for the ECB for some time yet. The growing importance of services prices in driving underlying inflation pressures is increasingly visible, with PMI manufacturing output prices falling rapidly, while services output prices remained elevated. Negotiated wage growth remained a modest 2.9% in Q4 22 (similar to Q3 22), but more high frequency wage measures based on jobs ads point to wage growth running closer to 5%, which is not consistent with the ECB's 2% inflation target.
China: CPI dropped to 1% y/y from 2.1%; hence China still has no inflation problem. PPI declined to -1.4% y/y from -0.8% y/y on the back of low commodity price inflation.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
Recommended Content
Editors’ Picks
EUR/USD stabilizes near 1.0800 as trading action turns subdued
EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.
GBP/USD extends sideways grind above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.