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Euro Inflation Key Market Mover This Week

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In focus today

The Hungarian parliament is expected to vote to ratify Swedish NATO Membership.

Early Tuesday we get Japanese inflation data for January. With Japan in technical recession, it will be interesting to see if also inflation data will further complicate a potential rate hike decision from the Bank of Japan. January Tokyo inflation data suggested price pressures eased significantly.

In the remainder of the week focus will be on inflation euro area Flash CPI for February Friday and US PCE inflation for January, which is released on Thursday. We expect the euro area CPI to still be well behaved measured on monthly momentum in the core CPI, which the ECB is watching closely. We also get unemployment data for the euro area on Friday. Friday we will also have US manufacturing ISM and China manufacturing PMI. Tuesday the Central Bank of Hungary will release its rate decision, while the Reserve Bank of New Zealand will release its cash rate decision on Wednesday.

Economic and market news

What happened over the weekend

In the US, Donald Trump took an expected but nevertheless big win with 60% of the votes in the race to become republican nominee at the US presidential election by defeating his only opponent in the race Nikki Haley in her home state South Carolina. Haley vowed to stay in the race, even though experts seem to agree that a comeback in the race is now very unlikely. Tuesday this week the primaries continue to Michigan. The following Tuesday 5 March is the so-called Super Tuesday where primary elections will be held in fourteen states and one Caucasus in one day.

Also in the US, President Joe Biden issued new sanctions against Russia in response to the death of opposition politician Alexei Navalny last week. Biden called the sanction package the largest since Russia invaded Ukraine exactly two years ago on Saturday. The sanctions are aimed at industries and people who supported Russia’s war efforts and commodity exports. The Biden administration is planning further sanctions with international partners – including the EU, where new sanctions on 200 companies and persons were also announced on Friday.

In Germany, the Ifo index showed improved business confidence in January due to a more optimistic outlook. Sentiment about current business conditions remained at low levels. The final GDP print for Q4 confirmed that activity in the German economy fell 0.3% q/q.

The European commission president Ursula Von der Leyen announced on Friday that EU will start ‘unfreezing’ Poland’s EUR137bn in frozen EU funds this week. The decision comes amid efforts by Poland’s newly elected government under Pro-European prime minister Tusk to restore the independence of the judiciary system.

Equities: Global equities were marginally higher Friday but worth noticing, we had yet another week with equity gains and several all-time highs. The earnings report for Nvidia received a lot of attention, but please note that gains were very broad-based, and industrials were the best performing sector last week. Higher-for-longer is still the dominating narrative and small caps was last week’s loser in relative space, gaining only 0.2%. In US on Friday, Dow +0.2%, S&P 500 +0.03%, Nasdaq -0.3%) and Russell 2000 +0.1%. Asian markets are mixed this morning with the Japanese market continuing higher while Chinese shares are about to break the 9-day gaining streak. Futures in Europe and US are lower this morning.

FI: Long-end yields trended lower in Friday’s session following a string of relatively optimistic statements from various ECB speakers on wages. 10Y Bund yields ended the day down by 8bp, with the German curve flattening from the back, while peripheral bonds fared slightly better than core EGBs. German ASW spreads fell marginally across tenors. Long-end yields also headed lower in the US, where 10Y UST yields closed down by 7bp at 4.24%. The pricing of rate cuts in 2024 for the ECB and the Fed is now 100bp and 78bp, respectively.

FX: Last week was characterized by positive risk appetite in markets, which led to the first weekly decline of the USD this year, bringing EUR/USD above the 1.08 mark. NZD, SEK, and GBP were the top performers in the G10 space, while CAD, JPY, and NOK were on the other side of the spectrum. In Denmark, banks’ net position dropped by DKK 2bn more than projected on Friday, but it will need to drop significantly more in the coming weeks for EUR/DKK FX swaps to start to move.

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