Euro Area Inflation Confirmed at 8.5%, ECB's Base Case is to Continue to Fight Sticky Inflation
Economic news and commentary for March 17, 2023
Euro Area Inflation
Euro area inflation in February was confirmed at 0.8% MoM and 8.5% YoY, down from 8.6% YoY in January. Core inflation was also confirmed at 0.8% MoM and 5.6% YoY. No major changes were made to subindexes with the exception of a slight increase in the pace of monthly food inflation, from 1.6% MoM in the first estimate to 1.7% MoM in the second estimate. The revision nonevent comes after the ECB raised rates by 50 bps in its March meeting, reaffirming its role as an inflation fighter despite the complications in the US financial system. The ECB also issued new base case forecasts on inflation that indicated it saw inflation falling through 2023 and 2024. Specifically, it sees the headline rate averaging 5.3% YoY in 2023 and 2.9% YoY in 2024 which is -3.2 ppts and -5.6 ppts below what was reported today in the February second estimate. Additionally, it forecasted core inflation averaging 4.6% YoY in 2023 which is -1.0 ppts lower than today’s data. However, these projections formed the ECB’s baseline path of inflation which was likely formed before financial instability came into the picture.
Because of the new rocky landscape, yesterday’s announcement avoided any forward guidance and stressed the data-dependent views of policymakers. Essentially, the ECB is now afraid of accidentally breaking something, so it wants to leave room to pause tightening, whether that be quantitative tightening or rate hikes, in the case that it needs to instill confidence in the banking sector. Credit Suisse has already provided an early signal of what could snowball into something worse. The absence of preemptive guidance should not be mistaken for the central bank taking a softer stance on inflation. The base case likely includes a few more rate hikes, perhaps each at a slower pace of 25 bps, and the ECB will look for conditions to align with that base case. Annual inflation only slowed -0.1 ppts in February, and core inflation actually increased 0.3 ppts to 5.6% YoY. Services inflation, stoked by wage growth, is proving to be sticky and may not have even peaked. The annual pace was up 0.4 ppts to 4.8% YoY in February. It has been said time and time again, but until the ECB is comfortable with the level of inflation in the context of its targeting, “there is still work to be done.” Hopefully, that doesn’t involve breaking something.
Still to come…
9:15 am (EST) - US Industrial Production
10:00 am - US Consumer Sentiment
10:00 am - US Leading Indicators
Morning Reading List
Other Data Releases Today
Italy's trade balance improved to €2.0 bil with exports up 0.2% MoM and imports down -3.2% MoM in January. Imports from non-EU nations fell a sharp -9.6% MoM and are down -0.7% YoY. Energy import growth has slowed, up just 4.2% MoM.
Euro area labor costs grew 5.7% YoY in Q4 2022, up from 3.7% YoY in Q3 2022. Construction (6.9% YoY) and services (6.2% YoY) sector wages were up the most. Industry wages were up just 4.4% YoY.
Canada's PPI fell -0.8% MoM in Feb, up just 1.4% YoY. The Raw Materials Price Index fell -0.4% MoM and -5.2% YoY. Energy product prices fell -5.8% MoM and non-ferrous metal product prices fell -2.4% MoM. Lumber prices jumped 7.4% MoM.
ECB Announcement
ECB hikes rates by 50bp (ING) - The European Central Bank (ECB) continues to fight inflation and has announced a rate hike of 50bp. Price stability concerns clearly trump any financial stability worries – at least for the time being.
European Central Bank Delivers, Again (Wells Fargo) - In a widely anticipated monetary policy announcement, the European Central Bank (ECB) raised its Deposit Rate 50 basis points to 3.00%. In raising interest rates, the ECB said "inflation is projected to remain too high for too long." Indeed, we observe the ECB projects headline and core inflation to remain above target over its entire forecast horizon.
ECB's 50bps hike, is it a signal for the Fed? (TD Bank) - March's 50 basis point decision leaves no question on the ECB's commitment to fighting inflation and the strong push-and-pull on the central bank. This will ring familiar to the Federal Reserve next week, where a 25 basis point rate hike is expected on our end, even though markets are not fully priced for that outcome. One distinction is that the ECB is not as far along in their rate hike cycle as the Fed, and faces more pressing inflation pressures than in the U.S.
ECB baseline sees further hikes, but market conditions could be key (ABN AMRO) - The ECB raised its key policy rates by 50bp. This was in line with our base line and the consensus of economists, however doubts had surfaced on the size of the move over the last few days due to the banking sector worries. Markets were pricing in a high chance of a smaller move in the run up to the meeting.
ECB Sticks To the Plan... +50 bps (BMO) - Anything short of a 50 bp hike today would have made the ECB look soft. But President Lagarde toned down the hawkishness to emphasize the data-dependency of their decision-making, and that it will be done on a meeting-by-meeting basis. And of course, they are "ready to respond" if needed, to ensure price and financial stability.
ECB Watch: Finally truly driven by incoming data (Nordea) - The ECB hiked rates by 50bp despite the uncertain market situation, but refrained from giving any firm guidance on what would happen next. We think the ECB remains worried about the inflation picture and will continue hiking in the upcoming meetings.
Flash ECB Review - 50bp hike, but no guidance for May (Danske Bank) - As expected, the ECB hiked its three key policy rates by 50bp today and gave no indications for the coming rate path. The ECB communication clearly highlighted the number of risks prevailing to the economic and inflation outlook, but should the baseline prevail once the current turmoil subsides, more rate hikes may be needed. We keep our call for a 50bp rate hike in May due to the still high underlying inflation, and a peak policy rate reached in July of 4%.
ECB hikes by 50bp and drops forward guidance, while keeping the door open to more hikes (ING) - The ECB continues to fight against inflation and seems unperturbed by the market turmoil of the last few days. Dropping forward guidance, lowering inflation projections, and a growing awareness that the tightening so far can have adverse effects all suggest that today's meeting probably marks the final phase of ECB tightening.
The ECB Hikes Rates Amid Financial Market Volatility (PIMCO) - The European Central Bank (ECB) raised its deposit facility rate by another 50 basis points (bps) to 3% at the March meeting, bringing its policy rate further into restrictive territory. Nonetheless, we would characterize the outcome as dovish because instead of giving strong guidance on its intentions for the next monetary policy meeting in May, the ECB opted for a cleaner meeting-by-meeting approach, with an emphasis on data dependence.
Europe | ECB: Roadmap to fight inflation on track despite financial turmoil (BBVA) - All in all, while the ECB delivered its promised rate hike today, its emphasis on data dependence, and the removal of forward guidance on rates suggests that it would act more cautiously going forward in the wake of recent adverse financial sector events.
US Housing Starts
A Data Build-Up (BMO) - U.S. housing starts and building permits jumped nicely in March. The pickup suggests that homebuilders are cautiously optimistic that the housing market rout may be bottoming soon. Meanwhile, manufacturing activity continues to rapidly lose steam, falling deeper into contractionary terrain. And, labour market conditions remain tight. The Fed has a tough balancing act ahead as it battles to restore price stability without rattling financial markets further and causing a recession.
Housing starts and permits rise strongly in February (TD Bank) - Housing starts rose by 9.8% month-on-month (m/m) in February to 1.45 million (annualized) units, coming in more than 10% above the consensus forecast of 1.31 million. Revisions to the two prior months were slightly negative, subtracting roughly 11k units from the previous reported tallies.
Single-Family Starts Remain Lackluster but Will Rebound Later This Year (NAHB) - Single-family production remained at an anemic pace in February as builders continue to wrestle with elevated mortgage rates, high construction costs and tightening credit conditions that threaten to be exacerbated by recent turmoil in the banking system.
Housing Starts and Permits Jump in February: Multifamily Drove the Gain, but Single-Family also Improved (Wells Fargo) - A jump in housing construction adds to the evidence that residential activity is starting to stabilize. Total housing starts jumped 9.8% in February, easily besting market expectations and reversing a five-month streak of declines. The upside surprise was mainly driven by a surge in multifamily starts, however, single-family starts also posted a 1.1% monthly gain.
Housing Starts Increased 9.8% in February (First Trust Portfolios) - Housing construction showed some signs of life in February, rising for the first time in six months and coming in higher than even the most optimistic forecast by any economics group surveyed by Bloomberg. Looking at the details, multi-unit construction was the reason for most of February’s gain. Though single-family starts did eke out an increase of 1.1%, it’s clear that 30-year mortgage rates hovering near 7% are keeping developers from investing in these types of projects.
US
US Economic Update – March 2023 (NAB) - Reflecting strong January data we have revised up our Q1 GDP growth forecast. That said, we still expect to see a downturn in the US economy this year.
Europe
Eurozone Banking Sector Solid, But Softening (Wells Fargo) - European banks are in focus today with banking sector stocks under some pressure. In this report, we provide brief and aggregated metrics related to the stability of the Eurozone banking sector.
UK house prices in February posted largest annual fall since end-2012 (S&P Global) - The Nationwide mortgage lender reports that UK house prices have fallen for a sixth month in a row, declining 0.5% between January and February. This was after house prices dropped by 1.8% quarter on quarter (q/q) in the fourth quarter of 2022, which was the first decline since mid-2020. House prices fell by 1.1% year on year (y/y) in February, which was the first annual decline since June 2020 and the weakest performance since November 2012.
Swedish inflation expectations: Relief (Nordea) - Longer-term inflation expectations fell in March, which is good news for the Riksbank.
Asia
Why China’s central bank has cut its required reserve ratio (ING) - China cut its RRR today by 25 basis points. We think this is partly to help the economy and provide a cushion against global market turmoil.
China Economic Outlook. March 2023 (China) - 2023 will be the “Year of China” after the authorities lifted “zero Covid” policy amid the global economic slowdown. How to rebuild market confidence and repair the household and enterprises’ balance sheets become the main challenges in the post-pandemic era.
APAC region expected to be resilient to global headwinds in 2023 (S&P Global) - Despite global economic headwinds from slowdowns in the US and EU economies, economic growth in the Asia-Pacific (APAC) region is forecast to strengthen in 2023. The key driver for the improvement in APAC regional growth will be from the rebound in growth momentum in mainland China due to the easing of COVID-19 restrictions.
Inflation
Weekly Pricing Pulse: Commodities edge higher despite market turmoil (S&P Global) - The Material Price Index (MPI) by S&P Global Market Intelligence increased 0.3% last week, its second consecutive marginal increase. The increase was narrow, however, with only three of the ten subcomponents climbing. The MPI still sits 34% lower year on year (y/y) which was the all-time peak. Prices, however, remain far higher (38%) than the pre-pandemic levels of the fourth quarter 2019.
Energy
What drove the three-day rout in crude oil (Saxo Bank) - The three-day 11% rout in Brent crude oil highlights the risk when speculative positions become too one-sided. Despite a rangebound market since November, the combination of backwardation and lower volatility helped drive a tripling of the net long held by hedge funds during this time. A long that is now seeing a forced reduction in response to a deteriorating technical and fundamental outlook.
Oil caught up in broader market weakness (ING) - Recent developments in the banking sector have spilled over into broader financial markets, and the oil market has been unable to escape this pressure. Oil fundamentals have not been strong enough to support prices. We have cut our forecasts, but where is the floor for the market?
Outlook
Rates Scenario for March 16, 2023 (BMO) - An update of BMO’s forecasts of interest rates in Canada, the US, and abroad including updates to projections for foreign exchange rates.
Fed FOMC, BoE meetings, March flash PMI in focus (S&P Global) - A busy and important week ahead is packed with central bank policy decisions from the US, UK and Taiwan, while inflation data updates will be due from several economies including the UK, Canada and Japan. The most recent indications of economic conditions in March will also be gleaned from the flash PMI data from major developed economies, due next Friday.
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