The more hawkish policymakers at the European Central Bank are expected to toughen their resistance to calls for imminent interest rate cuts at its meeting next week after eurozone inflation proved stickier than expected last month.
The ECB is set to leave rates on hold and continue to say that it needs more evidence that wage growth is slowing before it is ready to discuss a potential easing of monetary policy.
Several analysts pushed back their forecasts of when the ECB is likely to start cutting rates from April to June after data released on Friday showed eurozone inflation slowed less than expected in February.
Growth in consumer prices slowed from 2.8 per cent in January to 2.6 per cent in February. But there were signs that rapid wage growth is keeping services sector inflation stickier than expected after it slowed only slightly to 3.9 per cent.
Krishna Guha, vice-chair of US investment bank Evercore-ISI, said “stubborn” services inflation in Europe meant the “majority of the ECB governing council will probably interpret this as a sign that domestically generated inflation is not on a sustained downward trend”.
Eurozone wages rose more than 5 per cent last year and further strong rises are expected this year, as workers look for their pay to catch up with the recent surge in the cost of living.
Holger Schmieding, chief economist at German investment bank Berenberg, said this was likely to encourage the ECB to take a “cautious approach — as it would not want to undo its progress in the fight against inflation on the home stretch towards the target”, making it unlikely rates would be cut before June. Martin Arnold
Did US hiring slow in February?
The US is expected to have added fewer jobs in February after a much higher than expected figure in January, but that is unlikely to be enough to persuade the Federal Reserve to cut interest rates early.
The labour department is forecast to report on Friday that the US added 190,000 jobs last month, down from the 353,000 added in January, according to economists polled by Reuters. The unemployment rate is expected to remain at 3.7 per cent.
The expected slowdown is being seen as an indication of just how high January’s figures were. The number of jobs added was nearly double economists’ expectations, and was viewed by market participants as being exaggerated by seasonal factors, even after the seasonal adjustments the labour department makes to the data.
Analysts at Citi wrote that they were expecting a lower figure than the consensus for February, although they do not see extensive weakness in the labour market.
“Initial jobless claims have stayed at low levels, pointing to no widespread lay-offs occurring, while higher continuing claims suggest the duration of unemployment remains longer,” they wrote. “We are expecting 145,000 for payrolls in February but would not be surprised with a lower figure as seasonally adjusted strength in January will not repeat.”
However, unless the unemployment rate rises significantly, it is unlikely that the figures will persuade the Fed to cut interest rates earlier or faster than their current forecasts. In their last so-called “dot plot”, officials indicated they expect to cut rates three times this year, probably starting in the second half. Kate Duguid
Will China’s services sector drag down markets?
China will set its annual growth target next week but further measures to stimulate its spluttering economy may hinge on the confidence felt by the country’s smaller companies.
Top Communist party cadres will gather in Beijing on Monday and Tuesday for the annual Two Sessions meeting, which sets the country’s annual growth target.
Analysts at Oxford Economics expect policymakers to aim for lower growth than last year’s target of “about 5 per cent”, arguing that a target range of between 4.5 to 5 per cent “could provide policymakers the space to calibrate [their] stimulus this year, while supporting high quality development”.
Investors have been hoping for supplementary policies from Beijing to boost the economy and markets. That decision may be swayed by the publication on Tuesday of the Caixin’s purchasing managers’ index, which covers the country’s services sector.
The PMI index, a privately operated poll of business confidence, is expected to come in at 52.4 for February, according to a median forecast from economists polled by Bloomberg. That would be well above the 50-point threshold that delineates growth from contraction.
The Caixin gauge is important because it is focused on smaller and medium-sized private companies — in contrast to the official PMI, which favours state-owned firms — and thus gives investors a key reading on the outlook for a sector responsible for roughly half of China’s annual economic activity.
Robust services growth is important due to the steady stream of lacklustre manufacturing PMI readings that have weighed on markets since China fully reopened from the pandemic in January 2023. Growth in businesses centred around domestic tourism, restaurants, and catering services has helped offset that weakness. William Sandlund
