Focus turns to final March inflation for the Euro area

In focus today

Today, focus is on the final inflation data for March in the euro area. We particularly look out for inflation components that reflect domestic demand as service inflation remained elevated in March. The final data will also allow us to estimate how much the timing of Easter impacted the March numbers and to what extent we should expect an effect on the April numbers.

In Sweden, Deputy Governor Martin Flodén will talk about monetary policy communication in an uncertain world. Since he is one of the board members who has expressed the greatest concern about the SEK it will be interesting to hear what he has to say about the fact that its current development has put it not far from 3% below the Riksbank forecast and made it the worst performer in G10 since the Riksbank March meeting. Last Friday, the low inflation print took its fair toll on the SEK, stressing the Riksbank-SEK correlation, and on Monday the risk-off sentiment pushed EUR/SEK and USD/SEK to new year highs.

We continue to monitor the developments in the Middle East. Yesterday brought no signals in terms of a retaliation from Israel as the war cabinet was still deciding on a response. The cabinet is set to meet again today.

Economic and market news

What happened yesterday

Another day of diverging US/EU rate signals, as Fed chair Powell said that recent data has indicated that "it is likely to take longer than expected" to gain confidence that inflation is on track to target, while the Fed's Jefferson said if inflation proves to be more persistent than expected, the Fed was ready to keep the current stance for longer. Conversely, ECB President Lagarde said the bank was moving towards a moderation of current policy while Bank of France's Villeroy said the ECB should "decide a first rate cut in June" if things developed as expected.

Sanctions against Iran are on the way, as Janet Yellen said the US would use sanctions in conjunction with allies to disrupt Iran's "malign and destabilizing activity". UK PM Rishi Sunak said that the G7 was working on a package of sanctions while German FM Annalena Baerbock said several EU countries were reviewing their current sanctions.

German ZEW showed a continued weak assessment of the current economic situation while expectations for the future economy have risen. This was in line with other indicators suggesting weak near-term growth but that the worst is behind us as the cyclical headwinds have started to turn. Read more in Research Germany - Worst is over in German manufacturing sector, 15 April.

Equities: Global equities were lower again yesterday, despite a slight comeback in the tech sector. Yesterday's sell-off centred around Asia and Europe, mostly reflecting the catch-up to the US cash session on Monday. Interestingly, we saw US yields ticking higher, with the sum of macro data being positive. This is ultimately a positive sign for the economy but presents a short-term challenge for equities, as yields are increasing too much, too fast for equity investors to be confident. After the latest tiny setback in equities, we are now seeing many pundits calling for a high likelihood of correction, but they do not back up their claims with action. In our opinion, it is cheap talk, a sign of uncertainty, and a cover in case equities should turn lower. We see a below-average risk of a correction and a higher likelihood of equities going 10% higher from here than 10% lower.

FI: Absent market significant news, rates traded higher from the long end in a bearish steepening move, in the European trading session. 10y Bunds briefly traded above 2.5% but ended below the mark. Last night, Powell said that the recent data 'have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,' in a pull-back on rate cut expectations and added that due to the labour market strength and inflation progress 'it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,'. Market's reaction to the comments was relatively muted. The Dec24 Fed pricing was only 1bp higher to 43bp cut.

FX: Yesterday, we published our monthly in FX Forecast Update - Gear up for prolonged NOK slump, 16 April. We see the case for lower USD rates as we believe markets underestimate the potential for more than one to two rate cuts in 2024. In the near term, this should weigh on the broad USD and in isolation bolster risk sentiment. In the process we see room for a temporary rebound of the risk-sensitive and from a relative-rates perspective oversold SEK. Over the medium term, we still see the USD moving higher. Overnight, EUR/USD has stayed above 1.06 while EUR/SEK and EUR/NOK have been flat around 11.64 and 11.67, respectively. USD/JPY is flat yet elevate at above 154.50 as the market mulls the intervention risk.