“There’s more good news out of Europe”…
… is something people don’t get a chance to say very often in the context of the bloc’s economy.
Just days after the market learned that the eurozone economy expanded 0.4% in Q1 (QoQ), double Q4’s pace and better than estimates, the ECB got more good news on Friday when inflation ticked up more than expected.
Specifically, consumer prices rose 1.7% last month (YoY), beating estimates (1.6%). That’s the best print since November. Even better (if you’re the ECB anyway), core accelerated 1.2% in April, up from March’s 0.8% and a six-month high. Consensus was looking for just 1% on the core read.
A simple assessment is that between the upbeat read on GDP and now the inflation beats, some of the near-term pressure has abated for the ECB.
But that’s probably wishful thinking. The core print for April is suspect, Barclays notes.
“Preliminary details indicate that the sharp rise in core inflation was essentially led by services [as] non-tradable prices jumped to 1.9% in April from 1.1% in March”, the bank writes, adding that “national level details indicate that the lion’s share of the surge in services prices was most likely due to a sharp rise in package holidays prices, notably in Germany.” Barclays is looking for some payback in May, when they expect core to “correct” as the calendar effect fades away. The bank sees core averaging 1.1% this year and 1.2% next.
“Although we expect core inflation to bounce back somewhat in April, the underlying trend has been stuck at 1%”, Goldman wrote Thursday, adding that “survey- and market-based measures of longer-term inflation expectations have fallen notably since late 2018, drifting further away from the ECB’s inflation aim.”
(Goldman)
It’s possible to write that off to cyclical forces, but as Goldman went on to fret, it “could also reflect doubts about the Governing Council’s resolve and ability to meet its inflation aim.”
In a sign that Friday’s data was nowhere near convincing and/or meaningful enough to offset the relative strength of the US economy and override trader caution ahead of a US jobs print (which comes on the heels of a relatively hawkish press conference from Jerome Powell), the euro held losses after the data, falling to its lowest since Monday.
Still, Europe will take anything it can get, and while this week brought more signs that the manufacturing slump is entrenched, ostensible “green shoots” from Q1’s GDP report and now April inflation data are, at the very least, not bad news.
