ECB predicts sharply rising wage growth

Market movers today

It is a very quiet day in terms of major economic data releases.
In the euro area, wage growth for Q4 16 is due out. Wage growth has been subdued in recent years despite a continuously falling unemployment rate. Wage growth figure is important in explaining core inflation and the low wage growth is one of the main reasons core inflation also remains subdued. While the ECB predicts sharply rising wage growth and core inflation in coming years, we believe that ECB is too optimistic and we expect the wage growth figures for Q4 will be broadly unchanged from Q3. See ECB's core inflation forecast is still too optimistic, 14 March 2017.

Selected market news

On Friday last week, the US manufacturing production for February came out at +0.5% m/m (unchanged from January). Manufacturing production has increased for six consecutive months now, which is the first time since July 2014. Hence, hard manufacturing data is recovering as indicated by ISM/Markit PMI.

In addition, the University of Michigan consumer confidence came out strong at 114.5 in March from 111.5 in February. We still view private consumption as the main growth driver in the US, although real wage growth has slowed. More interesting though, was the big drop in the University of Michigan long-term inflation expectations to 2.2% y/y from 2.5% y/y, which is a new low. The long-term inflation expectations measure has declined significantly since around 2014 when it was around 2.7-2.8%. While it seems as if the Federal Reserve accepts that inflation expectations are not as high as previously, we think this could be a concern, as core inflation also remains somewhat below 2%.

On Friday in Sweden, the government proposed to reduce the Swedish currency reserve. This is in line with the 2013 Flam committee proposal and has wide parliamentary support. The idea is that RGK SEK250bn on-way lending to the Riksbank FX reserve is too costly. Now, it will be reduced by SEK250bn (no FX implications as both lending and assets are in foreign currencies). Aside from the remaining SEK200bn FX reserve, the Riksbank will have an extra SEK50bn at the Debt Office (if needed). This means that Sweden's overall government debt will fall by 5 percentage points of GDP.

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