German inflation as a bellwether for Euro area inflation on Thursday

In focus today

In the US, JOLTs Job Openings are due for release for February. As companies have reported cooling hiring plans and availability of workers has improved, we expect job openings to trend lower over the coming months, which would pave way for the first rate cut from the Fed.

In the euro area, focus is on German inflation data ahead of the important euro area inflation print for March on Thursday. The data released from other countries during Easter indicate that euro area HICP inflation on Thursday will be lower than the consensus forecast of 2.5% y/y as inflation came in lower than expected in France, Italy, and Spain.

Economic and market news

What happened overnight

In Australia, Christopher Kent, Assistant Governor of the Reserve Bank of Australia (RBA), announced a shift in the bank's liquidity provision method. They will replace the current practice of setting a rate floor with excess reserves and an exchange settlement rate with open market repo operations at a price close to the cash rate target. The RBA will soon conduct public and market consultations on this new system before finalizing operational details.

What happened during Easter

In the US, the PCE price index was in line with expectations in February, coming in at 2.5% y/y (0.3% m/m), while the core measure printed 2.8% y/y (0.3% m/m). Overall, final data from the University of Michigan painted a benign picture. Consumer sentiment exceeded expectations at 79.4 (cons: 76.5), while inflation expectations over 1Y and 5Y horizons crept slightly lower to 2.9% and 2.8%, respectively.

Yesterday, the ISM Manufacturing PMI for March came in at 50.3, marking the first reading above 50 since September 2022 and indicating growth in the manufacturing sector.

In the euro area, M3 money supply was higher than expected at 0.4% y/y (cons: 0.3%), while loans to households and loans to non-financial corporations increased by 0.3% and 0.4%, respectively. The upbeat credit data supports the outlook for the recovery in the manufacturing sector this year. Additionally, ECB officials made statements during Easter. Cipollone (dove) emphasized that rate cuts could start in April if inflation and wage data align with ECB expectations of easing price pressures. Villeroy (hawk) stated that the ECB may cut rates independently of the Fed, a sentiment echoed by Holzmann (hawk), who noted the slower growth of the European economy compared to the US. Stournaras (dove) suggested the ECB might cut rates by 100bp in 2024, but there is no consensus within the central bank, with some officials preferring more moderate cuts.

In Japan, key data has been released over Easter. The Bank of Japan's (BoJ) large Tankan business survey showed that the service sector continues on a strong footing supported by booming tourism. Big non-manufacturers reported the best business conditions since the early 90s. The manufacturing sector slowed a bit but largely remains positive. Worth noticing, optimism is driven by big business, which has been able to take advantage of the weak yen. Following the March rate hike, this probably does not change much for the BoJ, which will think twice before moving again. It does however confirm that the economy remains robust, supported by particularly foreign demand, which is a prerequisite for tightening further. Tokyo March inflation (excl. fresh food) declined a bit to 2.4% on the back of core inflation pressures still close to an annualised 2%.

In China, PMI manufacturing for March surprised strongly to the upside with the official NBS PMI manufacturing jumping higher from 49.1 to 50.8 (cons: 50.1) and the private version from Caixin increasing from 50.9 to 51.1 (cons: 51.0). The NBS PMI manufacturing has hovered at a weaker level than Caixin PMI for some months, but the gap has now closed with the sharp rise in NBS PMI. Especially the export order indices were strong, which fits with our expectation of a moderate recovery in the global manufacturing cycle. The service PMI was also released from NBS showing a rise to 53.0 from 51.4. The Chinese economy seems to have gathered pace during Q1 adding upside risks to our 4.5% GDP growth forecast for this year, which were already in place following the hard data on retail sales and industrial production for January/February.

In Sweden, the Riksbank (RB) left the policy rate unchanged at 4.00%, as widely anticipated. RB maintained its dovish shift and signalled a first rate cut in May or June. 

Equities: It has been a fairly quiet Easter for global equities with some gains leading up to Easter before a bit of retracement yesterday. Most interesting was the move in bond markets yesterday (more on this below). Worth noticing on the equity side we still see the inflationary trade continuing with the energy sector outperforming as the oil price is ticking higher. The benign PCE report from US last week did not change that, and near-term risks to equities are still coming from too high inflation prints and a move higher in leading inflation data. In US yesterday, Dow -0.6%, S&P 500 -0.2%, Nasdaq +0.1%, and Russell 2000 -1.0%. Asian markets are mixed this morning with Chinese markets massively outperforming after a broad set of encouraging PMIs. US futures are marginally lower while European futures are marginally higher.

FI: Since our latest EUR FI update on Wednesday, most of the market action played out yesterday. The surprisingly strong US manufacturing ISM figures added to the market's uncertainty about the prospects rate cuts this year: The probability of a June cut of 25bp declined to 50% yesterday, while the UST yield curve rose 10-12bp with the largest increases located in the long end. Market-based inflation rates moved only slightly higher, making real rates the dominant driver of yesterday's move. The Bund curve is close to unchanged since Wednesday (Europe was closed yesterday).

FX: It has been a quiet start to the week with Europe largely out for Easter. Scandies were off to a poor start to the week with EUR/NOK breaching firmly above 11.70 and EUR/SEK close to the 11.60 mark. Conversely, USD and CHF regained ground ahead of a packed calendar in terms of data releases.