Expectations was skewed towards a downside surprise after a slightly lower-than-expected reading from Germany yesterday (1.0%) and Spain this morning (0.0%). Thus, the market reaction has been fairly strong in rates, EUR/USD and on the inflation markets, where 1Y EUR inflation swaps are up 6 bp and the rest of the curve is up 1-4 bp.
Details showed that energy prices held back inflation with a drop of 2.2% y/y in February. Eurostat’s core inflation measure, which excludes food, energy, alcohol and tobacco, increased to 1.0% y/y from 0.8% y/y in January. Italian preliminary HICP inflation numbers were released at the same time with a slightly drop to 0.5% y/y from 0.6% y/y in January. Thus, French inflation – the only significant missing piece – was probably unchanged at 0.8% y/y.
We maintain our long-held view that (core) inflation is most likely to reach a low point in March. We expect inflation around 1% from April to autumn and very gradual rises thereafter.
Today’s information is important to the ECB but not decisive in our view. The key to the ECB meeting next week will be the staff projections including the new 2016 inflation projection. Our view is very similar to Mr Draghi’s speech from yesterday, which we would summarise like this: Inflation is low enough to be a concern to the ECB, but there is no deflation in the Euro area. Inflation expectations are firmly anchored. However, low inflation for long is a risk and therefore the ECB will carefully assess the reasons for low inflation. Recently, falling energy prices and rebalancing in the periphery has held inflation down. This is not a big concern. However, to the extent that demand weakens further it would be a concern. Mr Draghi: “Against this background, we will remain alert as to whether any indications on further downside risks to price stability emerge and we stand ready to act.”
Nordea