UBS On-Air: Paul Donovan Daily Audio 'Inflation (but not the really exciting sort)'
The Eurozone is set to release flash consumer price inflation data for February, with expectations firmly rooted in stability, indicating that inflation concerns are muted. Per the full note from UBS, there is no indication of an affordability crisis in Europe, especially when compared to the situation in the U.S. While the data remains generally benign, European governments have implemented policies that tend to suppress inflation rather than exacerbate it. Added to this, the latest producer price index data from the U.S. reveals underlying inflation trends that could impact future Federal Reserve policy as it contemplates interest rate adjustments.
What the desk is arguing
The desk argues that current European inflation data is unlikely to provoke any market drama, as evidenced by Paul's commentary noting stable inflation figures across major economies like Germany and Spain. This view aligns with the benign inflation picture, suggesting stability rather than volatility in the Eurozone.
Supporting this perspective, Paul Donovan observes that both food prices and electricity costs in the Euro area are subdued, contrasting sharply with U.S. conditions where affordability is a pressing issue. Importantly, details across the producer price index will be critical for the U.S. Federal Reserve as they consider monetary policy moving forward.
Where it sits in our coverage
Our consolidated target for EUR/USD sits at 1.075, with a range of 1.04 to 1.12. Firms like jpmorgan set their shorts at 1.10 for March maturity, providing a robust cover against inflation uncertainties, while bofa proposes a more pessimistic target of 1.04 for the same tenor.
This stance appears to challenge the consensus view as the desk's outlook leans toward the upper end of the range outlined by our coverage, indicating stronger support for the euro against the dollar compared to marks projected by bofa.
How other firms see it
Overall, firms like jpmorgan align with our optimism towards the euro based on stable inflationary conditions, while bofa remains cautious, predicting downward pressure on the euro.
Additionally, with the inflation dynamics at play, the EUR/USD relationship could mirror movements in Fed policy discussions, particularly in relation to inflation indicators like the producer price index.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Eurozone inflation data expected to show stability
- 02U.S. inflation concerns contrast with Eurozone conditions
- 03Producer price indices to influence U.S. Fed policy decisions
- 04European reports set to further inform market sentiment
Market implications
Traders should focus on the upcoming inflation data as a potential pivot point for EUR/USD, with stability suggested in the upper range of our projections. The nuanced details of U.S. producer price data on the horizon may provide further context for Fed policy signaling.
Risks to this view
A shift toward higher inflation in the Eurozone, spurred by unexpected energy price spikes or changes in government policy, would undermine the desk's outlook. Additionally, a pronounced uptick in U.S. inflation could place upward pressure on dollar strengthening, eroding Euro resilience.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 27th of February. February European inflation data starts to emerge from the provinces of the Euro empire today.
Of course, in theory, this is just a flash estimate, but as these change so rarely with the publication of the final numbers, the headline data is basically taken as accurate, even if details are lacking today. Germany and Spain are expected to offer basically stable inflation figures. French inflation should increase a little from an extraordinarily low number.
There's nothing here to suggest an inflation concern. There's nothing here to suggest an affordability crisis either. That's more a US thing.
European governments have generally not pursued policies that are likely to push prices higher with some very, very specific exceptions. Things which shape inflation perceptions like food prices remain benign with a modest pace of growth and electricity prices in the Euro area are even falling, a concept US consumers may struggle to comprehend at the moment. We also have inflation data from the United States, albeit higher up the supply chain with January producer price inflation.
Companies were keen to pass on price increases in December of last year, it seems, which added to the end-of-year inflation story. That may be less evident now in the January data, although there can be very little hope of companies reversing price increases. And January sales associated with price discounting are not really a concept that plays out at a producer price level.
For economists, the focus will be on the details as there are components of the producer price data which directly feed into the personal consumer expenditure deflator. And it is the PCE deflator that is going to be in focus in the increasingly divided debates of the US Federal Reserve. The battle there is about how quickly the eventual post-tariff disinflation forces emerge or whether there may be a little bit more stickiness to price inflation.
One producer price inflation number is not going to give a definitive conclusion, of course, but the details will provide much excitement. The People's Bank of China has scrapped a reserve requirement for forward contracts selling Renminbi. Putting that another way, the central bank is making it easier to sell the currency.
The PBOC would no doubt rather have the private sector sell the Renminbi rather than be forced to sell it itself through intervention. That periodically creates international political tensions and there is the increasingly problematic issue of what to do with the proceeds of the sale at a time when there is less enthusiasm for automatically just buying US government bonds. As ever, this may be less about the level of the currency and more about the recent pace of change.
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