Global Daily – Peak inflation

by: Nick Kounis , Maritza Cabezas , Arjen van Dijkhuizen

Euro Macro: February to mark peak in eurozone inflation – German inflation accelerated more than expected, up to 2.2% in February from 1.9% in January. The consensus forecast was 2.1%. The rise appears to have been driven by energy and food price inflation. Given energy price developments on a year-on-year basis, we think this will most likely mark the peak in headline inflation and expect it to drift lower in the coming months. On the eurozone level, we expect a further rise in the headline rate in February (flash published tomorrow), with headline inflation possibly rising to 2% (from 1.8% in January). However, core inflation is likely to remain weak and we are forecasting a small dip to 0.8% yoy from 0.9% yoy the previous month. For the eurozone too, we think February will mark the peak in headline inflation. The ECB has mostly put emphasis on the core rate in its deliberations, so we think it will largely look through rising headline inflation as long as underlying inflationary pressures remain weak. It seems likely that core inflation will remain subdued in the next few months, given anaemic wage growth. (Nick Kounis)

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Fed View: Next rate hike now seen in March – We now expect the Fed to hike rates this month. The sharp year-to-date improvement in US business surveys signals the possibility of accelerating US growth in early 2017. On top of this, Fed officials have struck a hawkish tone in the past few days and we think that they are preparing markets for a rate hike in March. New York Fed President William Dudley, typically considered a dove, noted on Tuesday that the case for a rate increase has become “a lot more compelling”. John Williams, President of the San Francisco Fed, said on Tuesday that March is “very much on the table for serious consideration”. Following the speeches, markets priced in an 80% probability of a rate hike in March. Although we have brought forward the next rate hike to March, we continue to forecast three rate hikes in 2017. We keep the next two rate hikes in June and September. The risks are tilted towards a fourth rate hike, but this will depend crucially on the size and timing of the fiscal stimulus. Markets are currently pricing in two rate hikes this year. See our note Fed Watch – Next Fed rate hike now seen in March (Maritza Cabezas)

Asia Macro: Regional growth supported by uptick global trade – Over the past quarters, economic growth in emerging Asia has been solid at 6%, despite external risks stemming from protectionist forces in advanced economies (such as Brexit and the Trump Presidency). One of the key factors supporting regional growth – next to some improvement in China’s growth momentum compensating for India’s slowdown post-demonetisation – has been a firming of global growth and trade, with the global tech cycle strengthening. This is for instance reflected in higher Q4 growth rates in highly export-oriented economies such as Hong Kong, Singapore and Taiwan. It is also reflected in the sharp recovery of Asian export growth as well as in regional PMI data. Earlier today, China’s manufacturing PMI indices, for instance, came out better than expected (both the official one as well as the one published by Caixin). Particularly striking is the recent improvement of the export subcomponent of both indices. All this shows that the recovery of global trade is putting regional growth on  a stronger footing, even though risks related to trade protectionism, amongst others, still remain. Read more in our Asia Outlook – Trade gains outweigh Trump risks published earlier today (Arjen van Dijkhuizen)