The big event for the Euro this week in the wake of the ECB meeting is the release of inflation figures. We have to remember that in her post rate decision press conference, ECB President Christine Lagarde insisted that future rate decisions will be data dependent. And there is no data more important to the ECB – and therefore market expectations – than CPI change.
The markets have been adjusting to expectations that inflation will come down faster than previously anticipated. This is despite the potential impact of the Red Sea crisis. That’s because lackluster economic performance is expected to weigh heavier on prices than the buoyancy of increased logistics costs. The question now is just how fast inflation falls, and at what point does it induce the ECB to start cutting.
What Are the Odds?
Despite Lagarde’s insistence last week that it was “premature” to talk about rate cuts, the markets appear to sense that easing is on the way. Following the rate decision, futures markets moved to price in an 80% chance of the first rate cut happening as soon as April. That was more than the 60% chance that was being considered prior to the meeting.
The market also moved to price in more cuts this year, with the average expectations of 140 bps in easing this year. That’s equivalent to over five rate cuts, and is close to the six cuts expected of the Fed. That’s a slight increase from the 130 bps that was priced in before last week, but suggests the direction the market is looking is towards easing. This could keep the shared currency under pressure, even if the upcoming data matches expectations. That’s because the market’s forecast for CPI implies that the easing will start in the second quarter.
It’s Not Just Inflation
The main reason for the expected slower inflation is a slowing economy. That economic underperformance is also seen as a factor that could urge the ECB to ease sooner rather than later. And tomorrow is the release of the first look at the shared economy’s performance last quarter.
As usual, the major economies report first, which could set up the market’s perception of the trend before the data for the whole Euro Zone is released. French Q4 GDP is expected to improve to 0.0% from -0.1%, which would allow it to escape a technical recession. Meanwhile, German GDP is expected to remain unchanged at -0.4%, and would stay in a technical recession. A similar fate is expected for the Euro Zone, which is expected to repeat the prior quarter’s -0.1% growth, and fall into a recession by the bare minimum.
What to Look Out For
France will also lead the CPI figures, with its January annual inflation rate expected to drop to 2.9% from 3.7% prior. Remember that December saw an unexpected jump in inflation, and so the drop would mean that price trends in Europe’s second largest economy resumed their downward trajectory. After each one of its states report inflation figures, Germany is set to report a slower inflation rate as well, down to 3.2% from 3.7% prior.
The whole of the EuroZone releases its inflation figures the next day, with the headline rate expected to drop to 2.8% from 2.9% prior. The core rate is also expected to come down slightly to 3.3% from 3.4% prior. That is still well above the inflation target of the ECB, and would presumably have to fall a lot faster in the coming months to justify the market’s outlook of a rate cut in just three months.
