Macroeconomic review: euro dragged lower by subdued inflation

Summary:

• More disappointing data from the US suggests the economy on the slowing path
• Low inflation in Europe can revive QE talk this year
• Tumbling profits in China a confirmation of problems

US -  weak housing, declining confidence and low inflation

That was another week of uninspiring data from the US. It started with housing starts declining by 9.9% y/y – the most since April 2011 and CB consumer confidence dropping to 124,1 pts., the second lowest reading since January 2018. UoM consumer confidence edged up (0.6p to 98.4) but only because current conditions are seen as better while expectations declined. Q4 GDP has been revised down and the most important regional indicator fell to 58.7 pts. – still high but lower than in February (64.7) and compared to expectations (61.4). There were some positives too – home sales in February jumped to 667k and January figure has been revised up and some regional indicators (Philly, Dallas) surprised to the upside but overall the data has been on the weak side. Last but not least, both core PCE inflation (1.8% y/y) and personal spending (0.1% m/m) was weak in January and while this is shutdown delayed report it throws more weight on the negative side when it comes to the US data. Crucially, stocks are not convinced as the US500 has surged up towards the close of the week (and month, and quarter) to seal a fantastic start of the year on Wall Street and leave any issues for the second quarter. The next week will indeed offer a huge update with both ISM indices and the NFP report on Friday.  

US sentiment measures converged in March but overall it seems like the consumption peak is behind us. Source: Macrobond, XTB Research

Europe – low inflation another blow for the euro

Euro has been completely unable to capitalize on the dovish turn from the Fed as the European data remain the most dismal of all the key regions. Although the week started on a bright note with the Ifo index increasing (which we would not celebrate too much as the Ifo is not as valuable advance indicator as the PMIs) it ended with inflation disappointing once again. Inflation in Germany, France and Spain was lower than expected and only surprised to the upside in Italy. This will be hard to swallow for the ECB and could accelerate speculation about the QE renewal. Euro was hit as German 10-year bund yield slumped below 0% but actually the pace of yield decline is even higher in the US and at present we are looking at a major divergence between the bond market and the EURUSD.

Is it a time for a weaker dollar as bond yields decline at a faster rate in the US despite stronger economy? Source: Bloomberg, XTB Research

Asia – profits in China slump

In Asia the most important release was the estimate of corporate profits in China that slumped 14% y/y over the first 2 months of 2019 (the result is combined to account for different dates of the Lunar New Year). That follows 2 years of solid profit increases but nevertheless a decline of this magnitude (the steepest since 2011) is a concern, and another sign of troubles in the Chinese economy.