Key Events: Is Europe Due for a Q1 Services Inflation Shock?

Key Events

G10

In the US, the key data is:

1. PCE, personal spending and income – Friday. Personal spending will likely show the consumption weakness implied by last week’s retail sales was overstated. Core PCE will likely print near market consensus of 2.6%.

In the Eurozone and UK, the main events will be:

1. EZ final January CPI – Monday. We have warned services inflation could overshoot in Q1, which appeared to happen in January. Q1 can be volatile, so we avoid reading too much into it, but the full details on Monday should offer clarity.
2. Preliminary February CPI for Spain, France and Germany. Strong services inflation would feed into our fears that Q1 inflation will overshoot ECB expectations. French services CPI was weak in January – will that reverse in February?

Elsewhere in G10:

1. New Zealand retail sales – Sunday. We see risk of an upside surprise on our broader view that economic greenshoots are appearing.
2. Japan Services PPI – Tuesday. Following the sharp increase in food prices, we watch to see how producer prices fare for services firms – particularly those where labour comprises a larger proportion of costs.
3. Australia January CPI – Wednesday. This is a tricky print to read. It is seasonally weak, and Commonwealth government rebates could leak into the numbers.
4. New Zealand ANZ Survey – Thursday. We expect conditions to keep catching up to expectations. Otherwise, we watch for pricing indicators to rise further.
5. Tokyo CPI – Friday. Rice and food prices continue to climb. Tokyo will provide an advanced reading of their advance in February.
6. Switzerland KOF Indicator – Friday. The indicator continues to support economic expansion.
7. Canada GDP – Friday. We expect a slowdown in January growth data following December’s bump. We pay particular attention to consumer spending.

Central Banks in Action

1. Fed speakers: seven next week. Hawks Hammack and Musalem recently highlighted the rise in inflation expectations and raised the risk that policy may too loose to return inflation to target, so we will focus on the doves, namely Goolsbee (Friday) and Harker (Thursday), to get their take.
2. Schnabel talks again. She was hawkish recently, stating that there may not need to be more cuts after March. We had expected this discussion, but not so soon. Q1 inflation will be the big driver.
3. BoE’s Pill, Lombardelli, Ramsden and Dhingra speak through the week. Ramsden’s outlook for QT will be important. So will whether Lombardelli (internal neutral) plays down the beat in inflation as Governor Bailey did. Pill will likely remain hawkish, and Dhingra dovish. We expect ultimately inflation will undershoot the MPR.

Markets to Watch

• AUD/NZD will remain in focus with another round of significant data releases on offer. We remain short AUD/NZD, targeting 1.06.
• EGB markets will be in focus following US comments around Ukraine. Ultimately Europe will need to spend more to cover the US retrenchment. We expect this (along with a more hawkish ECB) will support EGB yields ahead. We are paid 10Y EUR and positioned for 10Y OAT/Bund widening.

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