Global Daily – Inflation up to 2%, but core remains stable

by: Aline Schuiling , Nick Kounis , Kim Liu , Maritza Cabezas

Euro Macro: Inflation up to 2%, core stable – HICP inflation in the eurozone increased to 2.0% in February, up from 1.8% in January. The main components reveal that the rise was due to jumps in the inflation rate of unprocessed food (to 5.2% from 3.5%) and energy (to 9.2% from 8.1%). Meanwhile the core inflation rate stabilized at 0.9%. It has been hovering around this level since May 2015. Within core inflation, the inflation rate of non-energy industrial goods declined to 0.2% from 0.5%, but this was cancelled out by a rise in services price inflation to 1.3% from 1.2%. Looking forward, we expect headline inflation to have peaked in February and to start moving down significantly in the coming months, largely due to base effects in energy price inflation. Moreover, we think that that the decline in non-energy industrial goods price inflation has somewhat further to go, while services price inflation will probably remain subdued, given that wage growth is still sluggish. Indeed, a separate report published by Eurostat showed that the eurozone unemployment rate stabilised at 9.6% in January, which is considered to be above the level that would result in accelerating wage growth. (Aline Schuiling)

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Eurozone government bonds: French linkers price in regime shift – A Le Pen victory would most likely mark a regime shift and should lead to higher domestic inflation relative to the eurozone inflation rate. A key plank of the Le Pen policy agenda is to take steps to see France leaving the eurozone and therefore drop the euro for a new currency. Whether domestic inflation would be sustained at higher levels than eurozone inflation in the long-term is uncertain. Despite the popularity of Front National, we think that there is a very low probability of a Marine Le Pen victory in the French Presidential Elections. The market has nevertheless started to price-in this risk in French government bonds since November of last year. More recently, data suggests that French inflation linked bonds (OATi), which track the French inflation rate index, have outperformed bonds (OATe) which are linked to the eurozone consumer price index. Especially in the belly and long end of the curve we are observing a significant spread divergence. The spread development suggests that investors also expect that in the case of a Le Pen victory, French domestic inflation will be much higher than the eurozone aggregate index. What is more, in the zero coupon derivatives market we find an identical spread development. Given our expectations of a benign outcome of the French elections, we expect that the recent spread development will reverse. For more see our note, French linkers price in regime shift, for professional clients, please see disclaimers in the document (Nick Kounis & Kim Liu)

US Macro: Trade Policy Agenda for 2017 aims at bypassing the WTO – The Office of the United States Trade Representative, which by law has the primary responsibility for developing “United States international trade policy” published this week the President’s 2017 Trade Policy Agenda. The Agenda showed a sharp tone and signalled that the Trump Administration would not tolerate unfair trade practices that harm American workers. Four major priorities have been identified to achieve this: 1) defend the US national sovereignty over trade policy; 2) strictly enforce US trade laws, 3) use all possible sources of leverage to encourage other countries to open their markets to US exports of goods and services and 4) negotiate new and better deals with countries in key markets. The main message surrounding these objectives is that Americans are not directly subject to WTO (World Trade Organisation) decisions, which are not binding or self-executing. In fact, the document casts some doubt on the ability of the WTO and its interpretations, suggesting that unfair practices undermine the confidence in the trading system. The document suggests that a review of trade agreements will be part of the strategy, given “the alarming results” of US trade policy. This includes, among others, the North American Free Trade Agreement (NAFTA) and the trade deal implemented with South Korea.  It’s clear that President Trump’s Administration is committed to reform trade policy. He has already pulled out from the Trans-Pacific Partnership negotiations and has showed his preference for bilateral trade agreements in the executive orders he has issued. We anticipate some stress on the trade front in the coming time. However, our base scenario does not include tit-for-tat trade protectionism. (Maritza Cabezas)