Will eurozone core inflation remain stubbornly high?

Will eurozone core inflation remain stubbornly high?

Economists expect headline eurozone inflation to drop to close to a year low in February, but the core reading, which excludes volatile items like fuel, food and tobacco, is set to remain stickier.

The preliminary data released on Thursday will, according to a Reuters poll, show eurozone annual consumer price growth slowing to 8.1 per cent this month, down from 8.6 per cent in January. This would be well below the October peak of 10.6 per cent and the lowest since April 2022.

However, the decline is likely to be driven by lower energy price rises. Core inflation is set to remain at 5.3 per cent, the highest on record. Economists forecast the trend to continue throughout 2023.

Iaroslav Shelepko, economist at Barclays, said eurozone headline inflation this year would show a “sharp deceleration driven by further energy disinflation and its spillovers into food and non-energy goods inflation, as well as very negative base effects”.

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

Stubborn underlying price pressures will continue to support the case for the European Central Bank to raise rates. Markets have priced in a half percentage point increase at the ECB meeting on March 16. That would take the deposit rate to 3 per cent. It was minus 0.5 per cent only last July.

On Thursday, the ECB will also publish its account of the February monetary policy meeting, which concluded with a half percentage point increase. Investors will monitor it to gauge more details on the planned path for rates beyond March.

Ellie Henderson, economist at Investec, noted that the minutes come just hours after the February flash inflation print for the eurozone: “an off-consensus print could steal the limelight in markets from the backward-looking account”, she said. Valentina Romei

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

US companies will continue to report fourth-quarter earnings next week, with a swath of results from retailers featuring prominently. These ought to give investors some insight into the health of the US consumer and broader economy.

Retail giants Costco and Target, home improvement store Lowe’s and budget-friendly Dollar Tree are among those reporting, alongside big names like oil company Occidental Petroleum and tech business Salesforce. Although the Federal Reserve’s aggressive interest rate hiking has hit earnings in some sectors, retail results have so far been mixed as the US consumer remains bullish.

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

Earlier this month, the US reported that retail sales had risen dramatically in January, one of several pieces of stronger-than-expected data from last month which prompted investors to bet that the Fed will be forced to keep interest rates higher for longer.

Retail sales, which include spending on food and petrol, rose 3 per cent in January over December, one of the biggest monthly increases in the past 20 years.

Bloomberg analysts are forecasting declines in earnings per share and sales at Target compared with strong spending in the same period a year ago; a rise in earnings and revenue at Costco; modest sales growth at Lowe’s, albeit alongside a challenging outlook for the remainder of the year; and higher sales at Dollar Tree, driven by spending on food. Kate Duguid

How will China’s PMIs move markets?

China’s purchasing managers’ indices will take centre stage next week as investors keep a close eye on the state of the world’s second-largest economy and Beijing’s attempts to put the long hangover of zero-Covid behind it.

Both official and independent manufacturing PMIs for February will be released on Wednesday. Economists polled by Bloomberg expect the former — which concentrates on large, state-owned enterprises — to come in at 50.7, inching further above the 50-point line separating an expansion in activity from contraction.

The independent Caixin manufacturing PMI, meanwhile, provides coverage of the midsized private companies that make up the majority of the sector and is tipped to exit contraction with a reading of 51.3 in February.

If those forecasts come good, they would paint a positive portrait of factory activity that could push Chinese markets higher. The non-manufacturing PMI covering services sector activity is also expected to climb to 55, up from 54.4 in January.

Analysts at ANZ have forecast a reading of 50.5 for the official gauge “thanks to the reopening as well as post-holiday surge in production” following the long lunar new year holiday. They also noted a rebound in Chinese metro passengers to levels close to the second half of 2021, which “bodes well for a recovery in the services sector”. Hudson Lockett

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