Next week has a busy calendar, with a host of major market moving data coming out. What shouldn’t be lost in the crush is two key bits of data out of Europe that could be one more piece in the puzzle to see if the ECB will actually go through with a first rate cut in June.
The last few days have provided momentum to suggest that might be the case. The first was the release of flash PMI figures from the two largest economies and a preliminary result for the whole of the EuroZone. That showed that the outlook for major businesses in Europe improved more than expected by an important margin, the second time in a row. The reading for manufacturing is still in contraction, but services appear to be dragging the economy back into growth.
Getting the Data Together
ECB Vice President Luis de Guindos earlier in the week practically said that June was when rates would be cut. He provided some standard hedging, saying that unless there were any surprises, the easing was a done deal at this point. Other members have talked about even further easing. We have to remember that ECB President Christine Lagarde has repeatedly said that the data for the first quarter will be determinant for rate policy going forward.
The first of that quarterly data that will be important for the ECB’s decision comes out on Tuesday. That’s when EuroStat will publish its preliminary calculation of Q1 GDP, which is expected to show an anemic rebound to 0.2% from 0.0% prior. However, the data is likely to be telegraphed by the release of French and German GDP figures just a few hours earlier. French GDP growth is expected to remain negative but bounce to -0.5% from -1.7% in the final quarter of last year. That would put it firmly into a recession, despite the improvement. Germany, on the other hand, is expected to come out of a recession and score -0.1% growth compared to -0.2% at the end of last year.
The Rebound Leaves Room for Cuts
While the improvement in GDP performance will likely be a welcome sign for arthritis in Brussels and Frankfurt, it is still very slow and in the range that would allow for the ECB to cut rates to support growth. So, unless there is a bounce that is well above all expectations, the data is expected to be the first piece of Q1 information to cement a June rates liftoff.
Which means attention turns to the inflation rate, as it needs to come down enough to convince the ECB’s more hawkish MPC members that it will reach the target in a reasonable amount of time even if easing starts, , highlighting the importance of monitoring inflation trends. Monday sees the dripping out of German state-level CPI figures which the market usually uses to figure out if the main data point will miss or beat. Since Germany is the largest economy, and North Rhein – Westfalia is the largest state in Germany, typically the market will adjust to expectations when that figure comes out.
What to Look Out For
German preliminary CPI for April is expected to advance slightly to 2.3% from 2.2% prior, which could give investors a bit of a pause until the core data comes out the next day. Tuesday sees French CPI being published, which is also expected to tick up slightly to 2.4% from 2.3% prior. Analysts are blaming the uptick mostly on higher energy costs due to the tensions in the Middle East.
The EuroZone headline CPI rate, however, is expected to remain unchanged at 2.4%, despite the transitory price pressures. That is expected to leave the core rate on track to keep coming down and register 2.8% from 2.9% prior. reflecting the current inflation trends.
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