Euro area inflation figure for March is due today

Market Movers

• Euro area inflation figure for March is due today and we expect it to remain in deflation territory. This should occur because the drag from energy price inflation is set to go up despite the higher oil price. This is caused by the oil price being at a higher level last year, hence taking the yearly inflation rate lower. Core inflation will also be in focus after it declined to 0.8% in February from 1.0% in January. We look for higher core inflation in March as the early timing of Easter will be supportive. That said, the ECB's updated core inflation forecast of 1.1% on average in 2016 still looks optimistic to us.

• Today, Chicago Fed’s Evans and New York Fed’s Dudley are scheduled to speak.

• We expect Norwegian retail sales to have climbed 0.2% m/m in February, see Scandi Markets.

Selected Market News

Financial markets have appreciated the recent more dovish stance from the Federal Reserve following the remarks from chairwoman Janet Yellen on Tuesday. The market now does not discount the first full 25bp rate hike until next year, which consequently pushed the dollar down close to the low from earlier this month, which is the lowest since October of last year – EUR/USD tested 1.135 yesterday and seems to have found some support above 1.13. Longer-term inflation expectations continued to recover yesterday as well. Measured by the 5Y5Y breakeven inflation swap, inflation expectations have recovered some 30bp since the bottom. The US stock market is also catching up – the S&P 500 rose 0.5% yesterday and is now up about 1% in 2016.

Sentiment towards emerging markets has also found support from the change in tone on US monetary policy. Notably, the Brazilian stock market continues to rally. However, demand for Brazilian stocks is likely also getting support from the internal domestic dispute, where Brazil’s largest party on Tuesday left Dilma Rouseff’s government coalition raising bets on potential impeachment. An ousting of Dilma Rouseff is viewed by the market as something that could turn the tide for the Brazilian economy amid a deep recession. Finally, the oil market is also taking notice of the policy change. The price on Brent crude yesterday tried to make a firm break from the USD40/bl level.

Interestingly enough, the market was not spooked by another strong US ADP job report yesterday, which showed job gains in March of 200K and supports our call for 200K of job gains in Friday’s non-farm payroll release. Comments from Chicago Fed’s Evans yesterday may offer an explanation for the changed focus. Evans, although counted as a dove in the FOMC, once again highlighted the worrisome development in inflation expectations, which he thinks could be a result of the Federal Reserve undershooting its inflation target for too long. Consequently, he said, this calls for a ‘very shallow (ed. rate hiking) path’.

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