Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Further relief on eurozone inflation is expected on Friday with data expected to show the underlying rate of consumer price growth, which strips out more volatile energy and food prices, dropping below 3 per cent for the first time in two years.
That would be a key milestone for policymakers at the European Central Bank in the run-up to their next meeting on March 7 as they debate when to start cutting interest rates.
The headline rate of eurozone inflation has fallen steadily from its record high of 10.6 per cent in October 2022. Economists polled by Reuters forecast that annual price rises would continue to slow from 2.8 per cent in January to 2.5 per cent in February.
However, this is unlikely to be enough to convince rate-setters that the headline rate of inflation will quickly drop to their 2 per cent target, which would enable them to start cutting rates.
Peter Schaffrik, an economist at RBC Capital Markets, said this was “one of the last months where base effects will exert a significant drag” referring to downward pressure on inflation caused by the drop in energy and goods prices from their elevated levels a year earlier. “The remaining process of disinflation is thus likely to be somewhat slower than so far to date,” he said.
The minutes of the ECB’s previous meeting, published last week, showed policymakers thought it was likely “there would be a downward revision” to its inflation forecast for this year due to be released in March.
However, most rate-setters also agreed that “the disinflationary process remained fragile and letting up too early could undo some of the progress made”. Martin Arnold
Will the Fed’s preferred measure of inflation fall further?
The Federal Reserve’s preferred measure of inflation is expected to show that price pressures eased slightly in January, but progress is likely to be limited given what is already known about inflation last month.
On Thursday, the Bureau of Economic Analysis will release January’s personal consumption expenditures index data. Economists surveyed by Reuters forecast that the headline PCE figure will be 2.4 per cent year-over-year, down from 2.6 per cent in December. The core measure — which strips out the volatile food and energy sectors and is most closely watched by the Fed — is forecast to come in at 2.8 per cent, down from 2.9 per cent the previous month.
The data will come in the wake of hotter-than-expected CPI numbers for January, which showed the headline rate falling, but less than expected, and no decline in core inflation. Following the publication of the CPI data, traders adjusted their expectations of interest rate cuts this year. Thanks to hot January inflation, a strong jobs market and hawkish remarks from Fed chair Jay Powell, investors have moved from betting on six rate cuts this year to year, starting in June rather than March.
“PCE is going to print a number that is not consistent with reaching the Fed’s 2 per cent target in the near term,” said Eric Winograd, director of developed market economic research at AllianceBernstein. “I expect it will send the same message as CPI — that the progress the Fed is looking for is not there. We already know that this has not been a good month for inflation.” Kate Duguid
Will Chinese data bolster a market recovery?
Chinese manufacturing data released on Friday is expected to show a continued steadying of the sector that could aid authorities battling to arrest a stock market sell-off.
The closely watched Caixin manufacturing purchasing managers’ index is this month forecast to hit 50.6 — above the 50 threshold that separates expansion from contraction, though down slightly from January’s reading of 50.8. Even so, it would mark a fourth consecutive month of rising activity.
The figures come as Beijing tries to contain a market rout sparked by slowing growth and a crisis in the property sector.
After tumbling in 2023, the benchmark CSI 300 index of Shanghai-and Shenzhen-listed stocks has gained 3 per cent since January thanks to a flurry of state support. Last week, the People’s Bank of China slashed a mortgage-linked loan rate in an attempt to reinvigorate the real estate sector.
Although investor sentiment on China remains depressed, Bank of America strategists said last week that there was “scope for the country to be a relative outperformer among global peers” as bank lending picked up over the months ahead.
China’s “credit impulse” — the change in the flow of credit — was a “headwind for growth for much of the last year” but has now moved back into positive territory, BofA’s analysts said.
In a worst-case scenario, they expect China’s manufacturing PMI new orders index to dip just below 50 by mid-year. Equivalent indices tracking activity in Europe and the US are expected to fall more sharply. George Steer
