Global Daily – Inflation going down, down…

by: Aline Schuiling , Peter de Bruin

  • Eurozone money supply and bank lending remained very weak…
  • …while fall in German inflation signals further drop in today’s eurozone flash…
  • …setting the scene for ECB monetary easing next week
  • US durable goods orders suggest that we will see another healthy gain in investment in Q1

Global Daily Insight 28 February 2014

Eurozone bank lending and money growth still weak, …

Eurozone M3 growth rose to 1.2% in January, up from 1.0% in December, when the data was probably distorted by side-effects from the AQR. Compared to November (1.5% yoy) money growth still declined, keeping the series on the downward trend that started at the end of 2012. The rise in M3 growth was mainly due to a sharp rebound in the monthly flow of overnight deposits, which are notoriously volatile. More interestingly, the counterparts of M3 show that growth in loans to households (adjusted for sales and securitization) eased to 0.2% yoy from 0.3% yoy, while growth in loans to non-financial corporates stabilised at -2.9% yoy. The monthly flow data showed that loans to non-financial corporates actually fell by EUR 12bn (loans to households stable). All in all, money supply and bank lending remains extremely weak, which makes further policy easing by the ECB next week likely.

 while inflation continues to decline

The argument for ECB policy easing was also supported by preliminary inflation data from Germany, which showed that CPI inflation (national definition) fell to 1.2 in February, down from 1.3% in January. The harmonized HICP inflation rate declined to 1.0% from 1.2%. Detailed regional data suggest the decline in CPI inflation was mainly due to lower food, energy and package holiday inflation, which was partly offset by a rise in the inflation rate of clothing and shoes. Combined with a fall in inflation in Belgium (to 1.0% from 1.1%) the German data suggest that eurozone inflation (to be published today at 11:00 CET) declined to 0.6% yoy in February from 0.8% in January, which is in line with our forecast. Looking ahead, we expect inflation to ease somewhat further in the coming months, as it will probably be weighed down by food and energy prices and a persistent amount of economic slack. The European Commission’s economic sentiment indicator (published yesterday as well) added to the evidence that the eurozone economy remains on a trajectory of moderate recovery that will not significantly reduce the amount of excess capacity that has built up during recent years in the near future. Sentiment edged higher from 101.0 in January to 101.2 in February, which is only just above the long-term average value of 100 and well below historical highs of around 110-115.

 

US durable goods orders in line with weak manufacturing output… 

Durable goods orders fell by 1% in January. This was better than the consensus forecast of a 1.7% drop, though it needs to be said that December was revised down by 1pp to -5.3%. The drop was due to a fall in transportation orders, which can be extremely volatile from month to month, and outside transportation, orders actually rose by 1.1%. Still, the  trend in ex-transportation orders is downwards, which is in line with the recent weather-related weakness that we saw in manufacturing output.

 …but better news on the investment side of the report

Encouragingly, the investment side of the report contained better news. Admittedly, capital shipments fell by 0.8%, but this was not bad considering that December was revised upwards from -0.2% to 0.3%, while November saw a surge in shipments of 2.4%. As such, the 3mo3m annualised growth rate rose from 7.5% to 8.8% in January, implying that investment entered the first quarter on a strong footing. What is more, capital goods orders, which tend to lead the shipment data, jumped by 1.7%. This helped the trend in core orders to improve significantly, suggesting that investment will make another healthy contribution to growth in the first quarter. Indeed, record high profitability and an improved economic outlook should increasingly prompt firms to invest more in durable equipment during our forecasting horizon.