Declining Sentiment and Inflation Could Mean that Draghi is Correct on Policy

European stock markets drift sideways with DAX managing slight gains while the Euro Stoxx 50 is down -0.15%. Indices are stagnating at very high levels, but for now investors are hesitant of pushing things further, while awaiting key U.S. data and amid Fed musings about the number of rate hikes this year. ECB and SNB officials meanwhile continue to stress that expansionary policies remain necessary as the ECB pushes back against recent rate hike speculations. Asian stock markets mostly closed lower as the quarter end approaches, with Australia outperforming. Oil prices fell back from highs but  WTI futures remains above USD 49 per barrel.

German inflation set to pull back sharply. After Spanish headline HICP already came in weaker than anticipated, German state inflation numbers also suggest a lower than expected pan-German rate, which looks set to fall in February. This is weaker than anticipated and vindicates Draghi’s assessment that the inflation overshoot last month was due to temporary factors and those at the council that are arguing against a change in the dovish forward guidance.

EMU Sentiment Declines in March

EMU ESI confidence unexpectedly fell back in March. Eurozone economic confidence came in weaker than anticipated at just 107.9, from 108.0 in the previous month. After the strong round of PMI and Ifo indicators expectations had been for an improvement in the headline rate, but the ESI showed a dip in industrial sentiment as well as services confidence. The mixed indicators could well reflect the uncertainty as the Brexit drama unfolds and the ESI still improved in Q1 compared to Q4 last year, thus adding to signs that the recovery continues and that GDP forecasts for the first quarter come with a bias to the upside.

The ECB Liikanen says that the central bank needs to keep commitment on forward guidance. Another confirmation that the central bank is still standing firmly behind its dovish forward guidance and the implicit easing bias, with ECB officials clearly pushing back against rate hike speculation after Nowotny’s musings on exit strategies and the deposit rate, which are clearly not an issue for now and although there are demands to at least remove the easing bias, rate hikes won’t be on the agenda for this year at the very least.

UK Brexit minister walked back the PM’s apparent threat yesterday, that full security cooperation with the EU would be dependent on getting a good trade deal. Davies, the Secretary of State for Exiting the European Union, to give his full title, said “it’s not in any sense a threat” as May was simply emphasizing the need that both the UK and EU has in reaching a deal.