Will eurozone core inflation remain consistently high?

Will eurozone core inflation remain consistently high?

Economists expect eurozone headline inflation to fall to near an annual low in February, but underlying indicators that exclude volatile commodities such as fuel, food and tobacco will remain more stable.

According to a Reuters poll, preliminary data released on Thursday will show that annual consumer price growth in the eurozone will slow to 8.1% this month, compared with 8.6% in January. This will be well below the October peak of 10.6% and the lowest level since April 2022.

However, the decline is likely to be driven by lower energy price growth. Core inflation will remain at 5.3 percent, the highest ever. Economists predict that this trend will continue throughout 2023.

Yaroslav Shelepko, an economist at Barclays, said that headline inflation in the euro area this year will show “a sharp slowdown driven by further energy disinflation and its spillover into food and non-energy commodity inflation, as well as very negative base effects.”

But he warned that the decline in core inflation “is likely to be even more gradual as the underlying strong momentum takes time to fade.”

Sustained underlying price pressures will continue to encourage rate hikes by the European Central Bank. Markets valued a half-percentage increase at the ECB meeting on March 16. As a result, the rate on deposits will rise to 3 percent. Only in July last year it was minus 0.5 percent.

On Thursday, the ECB will also publish a report on the February meeting on monetary policy, which ended with an increase of half a percentage point. Investors will be keeping an eye on it for more details on the planned rate path after March.

Ellie Henderson, an economist at Investec, noted that the minutes come just hours after the February release of the eurozone’s flash inflation: “A non-consensual release could divert markets’ attention from the retrospective report,” she said. Valentina Romey

What do corporate earnings tell us about the health of the US economy?

US companies will continue to report fourth-quarter earnings next week, with a strong focus on the results of a number of retailers. This should give investors some insight into the health of US consumers and the economy as a whole.

Retail giants Costco and Target, home improvement store Lowe’s and low-cost Dollar Tree are among those reporting, along with big names like oil company Occidental Petroleum and tech business Salesforce. Although aggressive interest rate hikes by the Federal Reserve have weighed on profits in some sectors, retail sales results are mixed so far as consumer optimism in the US remains optimistic.

The largest US retailer, Walmart, this week reported strong fourth-quarter earnings, but posted a cautious outlook for the second half of the year, when sales are expected to fall.

Earlier this month, the US reported a sharp rise in retail sales in January, one of several stronger-than-expected data last month that prompted investors to bet that the Fed will be forced to keep interest rates high longer.

Retail sales, including food and gas spending, rose 3% in January from December, one of the biggest monthly gains in 20 years.

Bloomberg analysts see Target’s earnings per share and sales drop from high spending in the same period a year ago; growth in Costco’s revenue and earnings; modest growth in sales at Lowe’s, albeit a rocky outlook for the rest of the year; and higher sales at Dollar Tree driven by food spending. Keith Dugid

How will Chinese PMI affect the markets?

China’s Purchasing Managers’ Indices will take center stage next week as investors keep a close eye on the health of the world’s second largest economy and Beijing’s efforts to put the long Covid zero hangover behind.

On Wednesday, both official and independent manufacturing PMIs for February will be released. Economists polled by Bloomberg expect the first indicator, which focuses on large state-owned enterprises, to reach 50.7, further above the 50-point line separating growth from contraction.

Meanwhile, Caixin’s independent manufacturing PMI covers mid-sized private companies, which make up the bulk of the sector, and is projected to come out of the contraction at 51.3 in February.

If these forecasts come true, they paint a positive portrait of manufacturing activity, which could push Chinese markets higher. The non-manufacturing PMI, covering activity in the services sector, is also expected to rise to 55 from 54.4 in January.

Analysts at ANZ are forecasting a reading of 50.5 for the official gauge “thanks to a reopening as well as a post-holiday production surge” after the long lunar new year. They also noted the recovery of China’s subway ridership to levels close to the second half of 2021, “heralds a revival in the service sector.” Hudson Lockett