Daily Insight
Group Economics Macro & Financial Markets Research
1 March 2016
Inflation report signals ECB should be bold Nick Kounis Head of Macro and Financial Markets Research
unwinding upward trend…
Tel: +31 20 343 5616 nick.kounis @nl.abnamro.com Arjen van Dijkhuizen
Eurozone inflation turns negative again, while core inflation declines,
… we expect the ECB to ease policy more aggressively than the market consensus
PBoC cuts RRR rate by 50bp – more targeted easing on the cards going forward in China rather than bazooka
Senior Economist Tel: +31 20 628 8052 arjen.van.dijkhuizen@nl.abnamro.com
Eurozone inflation falls and it is not just oil There is probably a moment in every Governing Council meeting that the doves bring up how low inflation is and the hawks respond by saying it is all just energy and core inflation is off its lows (just guessing). Well that conversation is unlikely in March. Headline inflation dipped back into negative territory in February (-0.2% yoy from +0.3% in January), indeed partly due to energy. However, core inflation also fell back significantly (+0.7% yoy from 1%). It is now almost back to the lows seen at the turn of last year (of 0.6% yoy).
Import prices push core goods inflation lower %yoy
2.0
8 6
1.5
4 2
1.0
0
0.5
-2 0.0
-4
-0.5
-6 06
07
08
09
10
11
12
import prices ex-energy (lhs)
13
14
15
16
core cpi ind goods (rhs)
Source: ABN AMRO Group Economics, Thomson Reuters Datastream
Past upward effect from lower euro is unwinding The modest uptrend in core inflation has been basically reversed. There has been some softening of service sector inflation, but the biggest move in the core basket was a sharp fall
Insights.abnamro.nl/en
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Daily Insight – Inflation report signals ECB should be bold - 1 March 2016
in core goods price inflation (to +0.3% yoy from +0.7%). The upswing in core goods prices was a key factor behind the uptrend in the core. That reflected the delayed effect of the past fall in the euro, which had pushed up ex-energy import prices. The relative strength of the euro in recent months has seen ex-energy import prices coming down again, and with a lag, this is now dampening core inflation. Increasing risk of second round effects Headline inflation is likely to remain stuck in negative territory in the immediate future, while there is an increasing chance that second round effects from the fall in oil prices will further dampen core inflation against the background of weak demand. Indeed, inflation expectations have fallen sharply, while wage growth has also slowed. ECB will act more aggressively than expected We think that the weak inflation data adds to the already strong case for the ECB to significantly step up its monetary stimulus. We think it will act more aggressively than currently expected. Getting the euro back down is the only way to get core inflation up significantly over the coming months, but that is not going to be easy given the Fed is likely to be on hold and some ECB easing is already priced in. In addition, the ECB needs to provide a strong signal that it will do whatever it takes in order to push up long-term inflation expectations. Our base case is that the ECB will cut its deposit rate by 20bp in March and by another 20bp in June. We expect measures to cushion the blow for banks. A tiered deposit rate system and even longer duration refi loans look likely. Finally, we expect a EUR 10bn increase in monthly asset purchases and an extension of the programme to June 2017. This will be facilitated by removing the deposit rate floor for asset purchases. PBoC steps up monetary stimulus Staying with the theme of global reflation, the People’s Bank of China cut the required reserve ratio by 50bp, freeing up liquidity in the banking system. The cut in RRRs, which adds to monetary easing, should also be seen in reaction to capital outflows, which have been curbing liquidity in the banking system. This RRR cuts fits in our base scenario, as we expect RRR cuts (instead of policy rate cuts) to do most of the job in terms of further monetary easing this year. More broadly, it seems that the PBoC has become more careful with regard to using 'high-profile' benchmark interest rate cuts, given the uncertainties regarding the exchange rate. The PBoC has for instance recently lowered interest rates charged to banks on its medium-term borrowing facility, from 3% to 2.85%, while leaving the benchmark policy rates unchanged. We expect ongoing targeted easing rather than a monetary 'bazooka' from Beijing, as 'QE China-style' would run counter to the longer-term goal of deleveraging. We also expect the authorities to rely more strongly on fiscal stimulus, which was also communicated during the G20 Summit and in the 13th Five Year Plan. In fact, China has already stepped up its fiscal stimulus last year by raising infrastructure spending. We expect the country's budget deficit to rise to 3% of GDP in 2016, up from around 2.5% of GDP in 2015.
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Daily Insight – Inflation report signals ECB should be bold - 1 March 2016
Day
Date
Time
Country
Monday Monday Monday Monday Monday
29/02/2016 29/02/2016 29/02/2016 29/02/2016 29/02/2016
00:50:00 11:00:00 15:00:00 15:45:00 16:00:00
JP EC BE US US
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
01/03/2016 01/03/2016 01/03/2016 01/03/2016 01/03/2016 01/03/2016 01/03/2016 01/03/2016 01/03/2016 01/03/2016 01/03/2016 01/03/2016
00:30:00 02:00:00 02:00:00 02:45:00 09:00:00 09:55:00 09:55:00 10:00:00 10:30:00 11:00:00 15:45:00 16:00:00
Wednesday Wednesday
02/03/2016 02/03/2016
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Friday Friday Friday Friday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
Industrial production - % mom CPI - % yoy GDP - % qoq Chicago Fed - business confidence - index Pending home sales - % mom
Jan P Feb 4Q F Feb Jan
3.7 -0.2 0.3 47.6 -2.5
2.8 0.2
-0.2
52.3 0.9
52.0 0.8
JP CN CN CN NE DE DE EC GB EC US US
Unemployment - % PMI manufacturing - index (official) PMI non-manufacturing - index (official) PMI manufacturing - index (Caixin) PMI Unemployment - % Unemployment change - thousands PMI manufacturing - index PMI manufacturing - index Unemployment - % Markit - Flash PMI ISM manufacturing - index
Jan Feb Feb Feb Feb Feb Feb Feb F Feb Jan Feb F Feb
3.2 49.4 53.5 48.4 52.4 6.20 -20.0 51.0 52.9 10.4 51.0 48
14:15:00
US BR
ADP nat. employment report - thousands Policy rate - %
Feb Mar 2
205.3 14.3
03/03/2016 03/03/2016 03/03/2016 03/03/2016 03/03/2016 03/03/2016 03/03/2016 03/03/2016 03/03/2016 03/03/2016
02:45:00 02:45:00 10:00:00 10:00:00 10:30:00 11:00:00 13:00:00 14:30:00 16:00:00
CN CN FR EC EC GB EC BR US US
PMI services - index (Caixin) PMI composite - index (Caixin) Unemployment (mainland France) - % PMI services - index Composite PMI output PMI services - index Retail sales - % mom GDP - % yoy Output per hour nonfarm business sector - % qoq ISM non-manufacturing, index
Feb Feb 4Q Feb F Feb F Feb Jan 4Q 4Q F Feb
04/03/2016 04/03/2016 04/03/2016 04/03/2016
14:30:00 14:30:00 14:30:00 14:30:00
US US US US
Change in employment private employment - thousands Change in employment total - thousands Unemployment - % Trade balance - USD bn
Feb Feb Feb Jan
3.3 49.4 48.4 6.20 -8.3 51.0 52.0 10.4
51 10.4
49
49
186.4
165
52.4 50.1 10.2 53.0 52.7 55.6 0.3 -4.5 -3.0 53.5
53.0 52.7 55.1 0.1
54.0 0.1
-3.3 53.4
52.0
158.0 151.0 4.9 -43.4
188.0 198.0 4.9 -43.4
165 175 4.9
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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