Market movers today
The second ECB meeting of 2017 takes place today. The ECB acknowledged that ‘there are no signs yet of a convincing upward trend in underlying inflation’ at the last meeting in January. Even as headline inflation reached 2.0% in February, we do not expect the ECB to deviate from this stance. Mario Draghi has outlined four objectives for monetary policy, including that inflation convergence should (1) affect the medium term, (2) be durable, (3) be self-sustained (i.e. prevail when monetary easing ceases) and (4) be region wide. While we definitely see improvements across the region, we do not believe the inflation figures satisfy the four objectives, particularly not with core inflation staying below 1.0%. We therefore do not expect any policy changes today.
EU leaders will gather today and tomorrow for the European Council meeting to discuss the economic situation in Europe.
Weekly US jobless claims are due to be released at 14:30 CET. Claims have been trending lower since early 2016 and last week, data showed initial claims falling by 19,000 to 223,000 in the week ending 25 February, the lowest reading since 1973. The low claims figures are consistent with job growth above 250,000, although admittedly the link is fairly weak.
Selected market news
Chinese inflation and UK house prices overnight. China reported a 7.8% y/y surge in producer price inflation in February (previous: 6.9%, survey: 7.7%), painting quite a different picture than the consumer price inflation, which came in at 0.8% (previously: 2.5%, survey: 1.7%). However, the apparent divergence between the two measures should be seen in light of the decline in food prices. Adjusting for this, CPI was relatively stable at 2.2% and therefore within the government’s comfort zone. Taken together, the inflation report could therefore support further moderate tightening by policy makers. Also overnight, UK RICS house prices showed an unchanged level in February, with the index coming in at +24 (January: +25, survey: +23).
In terms of data, the US ADP report was yesterday’s highlight. The report came out strong with a reading of 298,000 jobs in February, the highest reading since December 2015, clearly pointing to upside risks to Friday’s US employment. In Europe, German industrial production rose a healthy 3.0% in January, but should be seen in light of the 2.4% decline the month before (although this was revised higher from 3.0%). In the UK, Chancellor Hammond revised the 2017 GDP forecast higher to 2.0% in the budget, which otherwise did not deliver any major changes.
The ADP report added to the bearish sentiment on fixed income markets yesterday. In the US, yields were higher but also in Germany, where the 10Y rose by 5bp. Meanwhile, the S&P500 index broke a two-day losing streak, as the increase in interest rate expectations lifted financial stocks. The sub-sector was higher by 0.7%, while the overall index gained a more modest 0.1%.This morning, stocks in Asia are struggling, with energy shares in particular under pressure after Brent crude oil prices fell 5.4% yesterday on a surge in US inventories.
