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German Inflation Back Around The ECB’s 2% Target

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German HICP inflation is due to be released today and we expect it to reach 1.9% for the first time since 2013. With German inflation back around the ECB’s 2% target, German scepticism about the very loose monetary policy is likely to intensify, but the latest comments from ECB President Mario Draghi clearly confirmed that the ECB will only react to higher inflation when it is seen across the euro area and there is a sustained adjustment in the inflation path. Related to this, the rise in both German and euro area inflation is lifted mainly by higher energy prices whereas the underlying inflation remains low as reflected by German core inflation at only 1.1% on average in 2016. The euro area HICP inflation figure for January is due to be released tomorrow.

The European Commission’s economic confidence indicator is due for release today. The latest figure for December was at the highest level since 2011 and pointed to yearly GDP growth around 2.5%. Last week, we got some early indications that the current strong economic sentiment will not prevail, but we expect the signals related to the current situation to remain strong in the release today.

Later this week, there are a number of important events, including the FOMC meeting on Wednesday and the January US jobs report due to be released on Friday. The Bank of England (BoE) meeting on Thursday and the Bank of Japan two-day monetary policy meeting ending on Tuesday will also attract some attention.

In Scandinavia, focus is on Norway today with the release of the retail sales figure for December and industrial confidence for Q4. For more info, see Scandi Markets on page 2.

Selected market news

Global criticism of President Trump’s decision to limit entry to the US from seven predominantly Muslim Middle East countries intensifies. In ‘the name of fighting terrorism’, Trump has ordered the admission of all refugees to be suspended for 120 days while Syrian refugees have been prohibited entry indefinitely and citizens of Syria, Iraq, Iran, Sudan, Somalia, Yemen and Libya banned from entering the US for 90 days. The Boston Federal Judge temporarily blocked its administration from enforcing portions of the order and world leaders, including Canadian Prime Minister Justin Trudeau and German Chancellor Angela Merkel, expressed their opposition against the order, arguing that a particular origin or faith does not justify placing people under general suspicion for terrorism. In the US, people demonstrated at airports and leaders of Google, Apple, Facebook, Netflix and Twitter, which recruit heavily overseas, joined the criticism.

Market participants have reacted by entering risk-off positions reflected in a weaker dollar and declines in Asian stocks. EUR/USD is trading at 1.0730 at the time of writing and Asian stocks are mainly in the red, though many markets in the region are on holiday break. The market might now start to price in a higher risk premium due to the unpredictability of Trump’s politics.

In France, left winger Benoît Hamon won the Socialist nomination over former PM Manuel Valls, marking a clear shift to the left for the party. Hamon’s flagship policy is the introduction of a monthly income of about EUR750 and his nomination reflects voters turning their back on the business-friendly reforms implemented by President Hollande. A survey on the presidential elections released on Sunday placed Le Pen in front with 25% of the votes followed by Fillon and Macron on 22% and 21%, respectively, in the first round. Hamon is projected to come in fourth, with 15% of the votes.

Danske Bank
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