German HICP inflation might edge up slightly

Market movers today

• In Germany the preliminary inflation data for March will give an indication on tomorrow’s preliminary euro-area inflation data. We expect deflation to have eased in March on the back of a less negative impact from energy prices. Specifically, we expect German HICP inflation to have edged up slightly to 0.0% y/y in March from - 0.1% y/y in February but there could be upside risk due to the early Easter this year.

• In the US focus will mainly be on the PCE-deflator for February – Fed’s preferred inflation measure. We expect core PCE to mirror the development in core CPI and to have increased 0.2% m/m. Personal spending for February is also due for release and we expect it to show a healthy gain of 0.4% m/m.

• In the week ahead the most important events are the US labour market report on Friday and euro-area inflation tomorrow. Greece is also expected to remain in focus.

Selected market news

Janet Yellen’s speech on policy normalisation late Friday evening repeated many of the messages from the March FOMC meeting, see Highlights from Fed Chair Yellen's speech, 29 March.. Yellen repeated that a rate hike at some stage later this year is suitable in light of the recent improvements in the labour market but without committing to a precise timing of the first rate hike. Yellen also argued that after the first rate hike the pace of the increase in interest rates is likely to be slow and that the peak in interest rates is likely to be lower than usual.

Fitch late Friday downgraded Greece’s sovereign rating to CCC (substantial credit risk) from B in an unscheduled rating announcement. Fitch’s main arguments for the downgrade was that ‘lack of market access, uncertain prospect of timely disbursement from official institutions and tight liquidity conditions in the domestic banking sector have put extreme pressure on Greek government funding’.

There appears to have been some progress in the negotiations between the Greek government and the three bailout monitors EU, ECB and IMF on a more detailed policy programme. Among others, it now appears that the government no longer plans to abolish the property tax. The Greek government hopes that an approval of a more detailed economic programme by the Eurogroup finance ministers next week will release a partial disbursement from the remaining EUR7.2bn aid tranche, as the EUR450m payment on an IMF loan next week could prove challenging.

In the US there was no substantial impact from Yellen’s speech on Friday. Asian stock markets are mostly higher this morning on the back of comments from Chinese central bank governor Zhou Xiaochuan suggesting considerable room to ease. The EUR is slightly weaker on the uncertainty surrounding Greece. The Nikkei is slightly higher despite disappointing industrial production data for February.