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Eurozone inflation has been falling steadily for almost all of the past 17 months and investors will be closely watching to see if price pressures continued to subside in April when that data is released on Tuesday.
Economists polled by Reuters forecast headline inflation in the bloc to remain flat at 2.4 per cent this month. Any overshoot could test traders’ confidence that the European Central Bank will start cutting interest rates in June, especially after hotter-than-forecast US inflation prompted them to scale back bets on the scale of Federal Reserve easing this year.
Recent business and consumer surveys show the eurozone economy is tentatively emerging from its recent stagnation and data on Tuesday is expected to show gross domestic product in the region expanded at a quarterly rate of 0.2 per cent in the three months to March.
But despite economic activity improving, most economists expect the fact that Easter fell in March rather than April to lower airfare and package holiday prices — bringing down services inflation for the first time in six months.
ECB policymakers have said they expect inflation to be “bumpy” over the next few months before its anticipated decline to their 2 per cent target in mid-2025 — not least because oil prices have risen and rapid wage growth is putting pressure on services prices.
Mark Wall, an economist at Deutsche Bank, estimated that upside surprises of at least 0.2 percentage points in services inflation and other domestic inflation indicators in both April and May “could challenge the [ECB’s planned June rate cut] as long as there was no clear source of inflationary distortion”. Martin Arnold
Is there any sign the US jobs market is cooling down?
Following a streak of stronger than expected US inflation readings, analysts and investors will be watching the next set of employment figures closely for further signs of heat in the world’s biggest economy.
Friday’s non-farm payrolls figures from the Bureau of Labor Statistics are expected to show that US employers added 250,000 new jobs in April, according to a Bloomberg consensus forecast — less than the 303,000 roles added in March.
The unemployment rate is projected to hold steady at 3.8 per cent, while month-on-month average earnings growth is also expected to remain at 0.3 per cent, in line with March’s number.
Labour market data remains a focus for market participants searching for clues about the future path of monetary policy. Traders have drastically scaled back their bets on interest rate cuts for 2024, shifting from expectations of as many as six quarter-point cuts as recently as January to predictions that the Federal Reserve will make just one or two cuts by December.
The latest jolt for markets came last week when fresh data showed that US economic growth had slowed more than anticipated in the first quarter of 2024 but price pressures had persisted, according to the Fed’s preferred measure of inflation.
For Ian Lyngen, head of US rates strategy at BMO Capital Markets, current consensus forecasts for Friday’s jobs figures “would do nothing to imply any Fed urgency to lower rates. Instead the jobs landscape is more likely to reinforce the perception that Powell has ample latitude to continue delaying cuts indefinitely.” Harriet Clarfelt
How buoyant is the UK housing market?
Investors will be looking at the latest signals on the health of the housing market this week for fresh clues on how soon and how fast the Bank of England could lower interest rates this year.
The Bank of England’s data on mortgage approvals in March, due on Tuesday, will show if the fall in borrowing costs since mid-2023 has continued to spur activity. Net mortgage approvals rose to 60,400 in February — the highest since September 2022.
Data on average house prices published by lender Nationwide will also signal whether easing mortgage rates have helped to stabilise the property market. Prices unexpectedly dipped 0.2 per cent month on month in March but were still 1.6 per cent higher than a year earlier, the fastest annual rise since December 2022.
“If the mortgage market and house price data continue to improve, this will be in line with policymakers’ view that the economy is in recovery,” said Tomasz Wieladek, an economist at T Rowe Price. “Bad news in the housing and mortgage market would push the [BoE] closer to an early summer cut, but good news will not move the needle much.”
Sterling has recently been buoyed by a run of resilient economic data that has led investors to scale back expectations of BoE rate cuts. Markets are now pricing in a September reduction in borrowing costs, with the possibility of one more quarter-point cut in the remainder of 2024.
The currency has fallen 1.7 per cent against the greenback since the beginning of January. Most other major currencies have been more significantly dented by the dollar’s rally. Stephanie Stacey