FI Eye-opener: Revised inflation reduces pressure on ECB

Ifo came in better than expected, supporting the view of an improving growth outlook. If the ECB were to act in March it would not because of growth, but a deteriorating inflation outlook. However, inflation was revised higher for January. Bund yields a bit higher. Friday’s flash inflation for February will be next crucial information.

Bund yields grinded higher during most of yesterday. Better-than-expected Ifo number underscored once again that if the ECB were to act in March it would not be because of the growth outlook. The Euro area is clearly recovering and growth momentum is gradually building. Low inflation remains the problem. Well, not low inflation in itself, which is a good and natural part of a recovery as long as inflation expectations remain well-anchored. Basically, in Mr Draghi’s famous words with low inflation you can “buy more stuff”. Low inflation for too long would risk leaving inflation expectation without an anchor and that is why the ECB at the January meeting said that a deterioration of the medium-term inflation outlook is one of two triggers for near term ECB easing. In February, Mr Draghi said that more time was needed to figure out if recent inflation disappointments was due to temporary factors or a deterioration of the outlook. Yesterday’s final inflation numbers for January was revised upwards to 0.8% from 0.7% in the flash, reflecting that at least part of the recent downside surprises proved to be temporary rather than a deteriorating outlook. Looking ahead, Friday’s flash inflation estimate for February will be crucial. We do not see it low enough to trigger an ECB cut in itself, and we still go for no more easing from the ECB.

Today, US house price data will be in focus together with details of the German Q4 GDP reading.

Germany: Another strong Ifo report

German companies surveyed by the Munich-based Ifo institute are upbeat about the present and remain positive about the future although they scaled down their export expectations a bit. That was no surprise given the recent string of weaker data from the USA and China as well as turbulence in serveral Emerging Markets. Business climate in manufacturing was unchanged, and expectations even increased a bit, which shows the confidence in domestic demand.

Today, details of the German GDP data for Q4 will be released.

New financial forecasts

We published new financial forecasts yesterday. We decided to leave rates forecasts unchanged, which basically points to slightly higher rates within narrow ranges on both sides of the Atlantics in the coming months. We did change our 3-month EUR/USD forecast to 1.38.