Focus On US CPI Inflation Report And ECB Rate Decision

The week continues with the US CPI inflation report and the European Central Bank (ECB) interest rate decision being at the top anticipated data releases. Inflation figures coming from the US are expected to be scrutinised by market analysts as Friday’s NFP report showed a tight labour market, strengthening the case that the Federal Reserve (Fed) could postpone the anticipated rate cut in June.  

In other news, the Reserve Bank of New Zealand (RBNZ) left its Official Cash Rate (OCR) unchanged  at 5.5% as expected. The RBNZ’s board acknowledged that economic growth in the country remains weak and stressed that “a restrictive monetary policy stance remains necessary to further reduce capacity pressures and inflation.”

US CPI Inflation Report

The US Bureau of Labour Statistics (BLS) will release March’s inflation data later today. The forecast is that headline inflation will likely come in at 3.4% on an annualised basis, higher than February’s 3.2% figure. Core inflation is expected to tick lower, coming in at 3.7% on a year-to-year basis.

Although core inflation seems to be falling, both figures are well above the Fed’s targeted levels. The BLS inflation report could play a role when it comes to the Fed’s monetary policy implementation as strong economic data in the last weeks, such as the latest NFP report, have dimmed hopes for a rate cut in June.

Royal Bank of Canada (RBC) analysts still forecast a reduction in borrowing costs in June but add that risks tilt to a delay. “The choppier the progress with inflation (as it has been in early 2024), the longer the Fed will need to hold rates steady. Our own base-case assumption is that the first rate cut will come in June, with risks tilting to a delay,” they note.

ECB Interest Rate Decision

The European Central Bank is expected to announce its decision on interest rates on Thursday afternoon. Most analysts do not expect the ECB’s governing board to relax its monetary policy although there is an ongoing discussion between its members as shown by comments on media.

According to data published last week by Eurostat, inflation fell unexpectedly to 2.4% in March. The figure is closer to the ECB’s target of 2% than ever before in the last few months, raising the possibility for a monetary policy change. Some analysts suggest that the eurozone’s central bank could start cutting rates in June but wage growth as well as services prices still appear elevated.

Market analysts at TD Securities suggest that  the ECB will opt for a policy hold after the April meeting. “In terms of signaling for June, we do not believe Lagarde will want to be any clearer that the first cut will likely come in June. As such, Lagarde will likely reiterate that the GC wants to see Q1 wage data before deciding when to cut," they note in their report.

Fitch Ratings Cuts China’s Outlook

Fitch Ratings revised China’s outlook to ‘Negative’ in its latest economic assessment while keeping its sovereign credit rating at ‘A+’. Analysts at Fitch wrote that their revision reflects increasing risks to China's public finance outlook, adding that the general government deficit could rise to 7.1% of GDP in 2024.

The report by Fitch said that GDP growth would moderate to 4.5% in 2024, from 5.2% in 2023. However, economists are optimistic regarding deflation as they noted that they “do not forecast a prolonged period of deflation, with inflation of 0.7% by end-2024 and 1.3% by end-2025.”

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