Fra BNP Paribas:
Fed View: New Fed Chair strikes upbeat tone on US economy – The new Chairman of the Federal Reserve testified before the House Financial Services Committee on Tuesday. The pre-released opening remarks suggested that the Mr Powell is becoming increasingly positive on the US economic outlook. Indeed, the language used was more upbeat in tone than in the last FOMC statement.
He noted that ‘the economic outlook remains strong’, explaining that ‘some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory. Despite the recent volatility, financial conditions remain accommodative’.
Still, his remarks on monetary policy remained balanced and consistent with the previous FOMC communication. The Fed Chair noted that ‘inflation remains below our 2 percent longer-run objective’ and that the FOMC needed to ‘strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis’.
Indeed the guidance on policy remained that ‘the Committee views the near-term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely’ and that ‘further gradual increases in the federal funds rate will best promote attainment of both of our objectives’.
Overall, Mr Powell does not seem to be signalling a faster rate hike path in this statement, though the more bullish language on the economic outlook raises the chances of that happening going forward. Indeed, we continue to see the risks to our base case of three Fed rate hikes this year as being skewed to the upside. (Nick Kounis)
Euro Macro: Headline inflation looks to have fallen on food prices – The preliminary estimate for HICP Inflation in Germany showed it declined to 1.2% in February, down from 1.4% in January. No details have been published yet, but regional data reveal that the drop in inflation was largely due to plummeting food price inflation. In contrast, the inflation rate of clothing and shoes jumped higher (by 2.5-3pps in most regions).
However, this seems to have been due to shifts in discount sales during the winter months, implying that in March, the inflation rate of clothing and shoes should decline again. Spain also published the flash estimate for HICP inflation in February today.
It jumped higher to 1.2%, up from 0.7%. According to the press report by Spain’s statistical institute, the increase was mainly due to upward base effects in electricity prices. Finally, inflation in Belgium declined to 1.5%, down from 1.7% in January.
The national inflation data that have been published so far, suggest that inflation in the eurozone as a whole (to be published on Wednesday at 11:00 CET) moved lower in February. We have pencilled in a decline to 1.2%, down from 1.3% in January, but the risks to our forecast seem to be tilted to the downside.
We expect eurozone core inflation to have stabilised at 1.0% in February. Looking further ahead, we expect that the headline inflation rate will temporarily rise on the back of energy price inflation. Core inflation, however, is expected to remain subdued in the coming months. It is expected to start a tentative upward trend in the second half of 2018, but to remain well below 2% throughout this year and the next.
The moderate rise in core inflation reflects that there still is plenty of slack in the eurozone labour market, which depresses wage growth. Indeed, the unemployment rate is still above the pre-crisis levels, while there is more slack than suggested by the unemployment rate alone, amongst others because there is a high level of involuntary part-time workers
