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Weekly Focus – Focus Turns to the ECB

Markets were in a waiting mode ahead of the March monetary policy meetings, and the latest round of inflation data did not materially rock the boat. Bond and equity markets remained stable while past weeks’ positive sentiment in FX markets took a breather.

Euro Area flash HICP for February came out above expectations at 2.6% y/y (Jan 2.8%) while core inflation was 3.1% (Jan 3.3%). Somewhat worryingly, monthly momentum in services inflation picked up speed, suggesting that underlying price pressures have remained uncomfortably elevated.

In the US, the Fed’s preferred measure of underlying inflation, the Core PCE, came in line with expectations at +0.4% m/m SA. Real consumption volumes fell by 0.1%, driven by weaker demand for cars and other big-ticket goods, while services activity remained more upbeat. This was reflected in prices as well, as core goods deflation continued (-0.05% m/m) while core services inflation picked up speed (+0.6% m/m). The Fed’s Mester summarized the data by saying it did not ‘change the calculus on policy rate decision’.

On the political front, US congress once again avoided looming risk of a partial shutdown with fourth short-term ‘continuing resolution’ funding bill in a row. This time, some signs of more concrete progress are emerging after congressional leaders signalled that they have reached an agreement on six of the 12 individual appropriations bills needed to fund the government. The new deadline for passing the bills is next week’s Friday, while the remaining six are still up for negotiations with an extended deadline on 22 March.

Next week’s key event will be the ECB meeting on Thursday. We and the markets expect no monetary policy changes, as recent speeches by governing council officials have suggested that ECB has set their sights on the first rate cut in the June meeting, in line with our call. ECB will also publish updated staff economic projections, where inflation will likely be revised to 2% for 2025. Growth forecasts will likely be revised lower for this year and remain broadly unchanged for 2025 and 2026. Read more from our ECB Preview – Policy normalisation in sight, 1 March.

On the data front, focus will be on labour market data from the US, with January JOLTs, ADP and finally the February Jobs Report due for release. We expect NFP growth to cool down to 180k and average hourly earnings to land at +0.2% m/m after the surprisingly strong January report. Leading data has provided mixed signals, but this week’s Conference board’s consumer sentiment survey showed an unexpected dent to previous months’ optimism. We discussed the latest data signals in our US Labour Market Monitor, 1 March.

In China, the annual key policy event, the ‘Two Sessions’, is up next week starting Monday, where focus will be on the government’s work report at the National People’s Congress (NPC). The report will include China’s new growth target, budget target and other key plans for the year. The growth target is widely expected to be set again at 5.0%, even if it seems like a fairly ambitious target given the less favourable base effects for 2024.

Finally, Danske Bank Research will publish updated economic projections for global and Nordic economies in the Nordic Outlook, due for release on Tuesday morning.

Full report in PDF.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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