Focus remains on US CPI for guidance regarding Fed rate hike

Market movers today

• It is CPI day today with the release of CPI inflation for March in both the euro area and the US.

• Euro-area inflation is not that exciting as we already have the Flash estimate. The final number is expected to be unchanged from the Flash report showing a headline inflation rate of -0.1% y/y and core inflation at 0.6% y/y.

• In the US focus will be on core CPI as it is one of the factors the Fed is watching closely. We look for core CPI to rise 0.2% m/m in line with consensus and the annual rate to be unchanged from February at 1.7%. This should inspire confidence for the Fed that it is still on track to meet the 2% target in the medium term (note though that the Fed is targeting PCE inflation and not CPI inflation).

• In the UK it is time for labour market data. We look for an unchanged unemployment rate at 5.7% (a little higher than consensus that sees a decline to 5.6%). Also keep an eye on wage growth, which is important for future inflation. We look for wage growth to rise to 1.7% (three-month average of annual rate) from 1.6%. in February - in line with consensus.

Selected market news

In the euro area the rally in the core continues with German bond yields moving even lower yesterday. Periphery spreads, however, widened as Greek risks are spilling over into the rest of the periphery and the Germany/Italy 30 year spread moved 12bp wider. It does not look like there is a real deadline on the Greek issue before the 12 May IMF repayment and we are a bit surprised about the magnitude of the contagion taking into account the ongoing ECB buying.

In the US, another round of unimpressive data was released yesterday and 2-10 year treasury yields ended the day 2-3bp lower while equity markets ended the day slightly down. Housing starts data for March showed a smaller rebound than expected and although the Philly Fed April manufacturing survey increased, the details were mixed and overall suggest only limited upside to the ISM and manufacturing activity in April.

This morning risk sentiment in Asian trading is mixed, with Chinese stocks gaining on speculation that China will implement further policy easing while most indices outside China are down.

In FX markets EUR/USD has continued higher as markets lowered the expected path for the Fed funds rate further yesterday. The market is now pricing barely no chance that the Fed will deliver more than one 25bp rate hike this year. We continue to expect a first 25bp rate hike in September followed by another 25bp at the December FOMC meeting.