Inflation worries moving up the agenda again

We continue to see large volatility in money and bond markets, as market participants struggle to assess the future path of interest rates with banking uncertainty on the one hand and data mostly pointing to continued high core inflation on the other. Fed data showed the second weekly decline in a row in US banks’ use of liquidity measures, but worries persist over especially regional banks, as well as over what effect the rise in interest rates may have on commercial real estate, which again could affect the wider financial system. Our expectation is that these concerns will gradually fade and that central banks will hike interest rates further, but we also recognise that visibility is low.

Euro area inflation declined significantly to 6.9% y/y in March, from 8.5% y/y in February. However, that decline was driven by energy prices, aided by the German “price brake” that came into effect in March. Core inflation stands at 5.7% y/y and (by our calculation) a seasonally adjusted 0.4% m/m, which is clearly too high and likely to be the focus of the ECB, rather than the declining headline. PMI and IFO data showed decent improvements in businesses’ assessment of both the current situation and the near future in March, across industries but especially in services. Across the euro area, pricing expectations are declining in manufacturing and to some extend retail, but not really in services. This supports the view that the pass-through of energy and other costs while decline as a driver of core inflation, but that wages to some extend will take over.

US PMIs and consumer confidence from Conference Board surprised on the upside, supporting the view that troubles in the banking industry have not at this point caused a large increase in concerns more broadly. Consumer inflation expectations remain high at 6.3%, and their assessment of the labour market, although slightly downgraded, is still very positive.

China’s official PMI declined for manufacturing in March to a still decent level of 51.9, whereas the index for services rose even further, to 58.2. Taiwan’s President Tsai Ing-wen is on a 10 day visit to Central America and the US, and it is likely that she will meet with the new speaker of the US House of Representatives Kevin McCarthy. His predecessor triggered a strong response from China by visiting Taiwan last year, but the question is how strong a response a meeting on US soil will get.

With next week being Easter week, it is likely to be fairly quiet in Nordic and other European markets. However, the US labour market report on Friday (Good Friday) is a key data release. Most indicators continue to point to a strong US labour market, and job growth was likely high again in March, which could support the case for a further US rate hike. During the following week, we get hard data for Euro Area industrial production and retail sales in February, which will likely show that both of these sectors continue to struggle, as services are currently the stronger part of the economy. US CPI for February is of course also key to watch. On Tuesday April 4, we will publish our Nordic Outlook with our views and fresh forecasts for the global and Nordic economies. Weekly Focus will be back on April 14. We wish all readers a happy Easter.

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