An update on US inflation and the start of earnings season for corporate America will garner most of the macro-market headlines this week, but traders will also be treated to an ECB decision, key data out of China and what should be a few amusing headlines from the Bank of England.
The ECB’s on hold, obviously. April’s gathering is a non-event in that respect. But Christine Lagarde will probably start cutting in June, so any color from her on the likely cadence (i.e., the frequency and pace) of the forthcoming easing cycle will help markets refine expectations.
With the US economy apparently nowhere close to recession, the ECB and the BoE have to be cognizant of the risk that cuts will create a policy divergence with the Fed in the event Jerome Powell ultimately can’t justify the three 2024 rate reductions tipped by the dot plot.
Headline CPI ran 2.4% in Europe last month and core was 2.9%. Markets expect between three and four ECB cuts through year-end (shown in green, above).
Europe’s basically in a recession, albeit not a deep one. It’s fair to suggest the ECB’s been more successful than the Fed in bringing inflation down convincingly, but there are so many caveats as to render such assessments largely meaningless.
What we can say, though, is that the monetary policy transmission channel in Europe worked better than you might’ve been inclined to expect. We are, after all, talking about a collection of disparate economies all running their own fiscal policy, and the country-by-country response to the energy shock was the furthest thing from uniform. It’s a small miracle the system works at all: Here’s one monetary policy for nearly two-dozen countries, all of which have their own macro-policy idiosyncrasies.
Turning quickly to China, Beijing will release CPI and trade figures for March in the coming days. Those updates are notable.
Chinese policymakers are struggling to convince the world the country’s not condemned to deflation. But the data isn’t especially encouraging.
Although consumer prices picked up in February, rising for the first time in six months, some of the uptick was surely attributable to holiday spending. And producer prices spent a 17th month in deflation.
As for the trade data, China’s export figures will get the analytical respect they always compel as a barometer of global demand, but currently the discussion’s a little more nuanced. The West is concerned about Xi flooding the world with cheap goods amid a domestic overcapacity problem. Janet Yellen raised that issue, among others, while in China for the second time in less than a year.
The import numbers out of Beijing will be viewed through the lens of a still-subdued domestic demand impulse which is in part responsible for moribund consumer prices.
Finally, the BoE’s all set to outline the results of a review conducted to determine why the bank’s inflation forecasts were so badly off the mark.
Regular readers will note that I update the visual below with each new MPR. I always say the same thing: The BoE’s forecasting track record during the post-pandemic inflation was poor even as pandemic-era/wartime inflation forecasting errors go.
Needless to say, critics are compelled to make allowances not just for the public health crisis and the war, but also for Liz Truss’s mini-budget boondoggle. Effectively, the BoE was hit with three black swans in succession.
Apologies and excuses aside, there are pressing questions. The BoE suffered a grievous blow to its reputation among the electorate. The institution’s domestic approval rating turned negative in early 2022 for the first time.
That’s the context for a landmark review of the bank’s forecasting methodology. The results of that study, as well as recommendations for improving the BoE’s forecasting methods, will be unveiled on Friday by the person who conducted the review: Ben Bernanke.
Write your own jokes.
