Europe | Monetary Policy & Inflation
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Key Points
- Eurozone inflation data will provide some good volatility for markets to digest into the early week. Market conditions won’t be helped by the US Memorial Day holiday.
Eurozone Inflation Data
With the June ECB meeting looming now, the next big data-points will be the May CPI outturns. There are a lot of unknowns, and that (alongside the US Memorial Day holiday) will probably sap some of the market liquidity into the early week. On this front, by the time markets open on Monday we should actually have a pretty decent view of the inflation picture, so expect some motion at the open. German Lande North Rhein Westphalia releases its numbers at 05:30 UK time on Monday, with Spain out at 08:00. In the Eurozone number the market right now is looking for a rise up to 7.7%, but with a surprisingly close clustering of estimates (st.dev: 0.2ppt); that’s the tightest since last November. Meanwhile, expectations are for an unchanged core reading. We would caution that the base effects for some of the biggest recent inflation drivers (diesel and electricity) are now negative YoY.
ECB hiking continues to be priced aggressively, with the best part of 6 hikes priced over the next 12 months. PMIs are slipping (albeit from high levels), consumer confidence is already in the doldrums, if CPI looks like it’s falling faster than expected it may be the death knell for the hawks. The tight cluster of expectations and relatively illiquid Monday morning market conditions could drive some big moves in rates if that was to be the case.
ECB speakers continue to flood the airwaves. Last week saw ECB hawk Klaas Knot joined by Robert Holzmann (and to a lesser extent Martins Kazaks) in his push for 50bps. Meanwhile, President Christine Lagarde has now set out a path towards non-negative rates (by end of Q3). Whether we’re at peak hawkishness remains to be seen (see here for our ECB monitor). What we expect is that when the dovish twist does eventually come it will do so in the form of the pausing of hikes (either after one or two 25bp hikes). The end of TLTRO attractive rates and net-APP in June however are unlikely to be derailed.