Eurozone April Inflation: Confirming Rate Cut for June?
Today marked the start of the two-day process in which the EuroZone updates the markets on its April inflation reading. The final number will be available on Friday, after major countries have reported their own versions. Typically, by then there is enough data for the markets to adjust to whether the final result is in line, a beat or a miss.
Preliminary German figures point to inflation coming down, which is the key component to maintaining expectations for a rate cut next month. Although there can be some market quibbles over how close the drop is to what was expected, in the main, lower inflation readings are what is needed to keep the current expectations for easing intact. That would presumably keep the Euro trading on track.
What to Look Out For
How fast inflation is coming down isn’t all that material, because the market and the ECB are largely in alignment for this eventuality. If there is a major surprise about inflation picking up the pace, that could jeopardize the consensus for a rate cut in June, and potentially put it off until August. That would be a relatively large change, given the lack of a rate setting meeting in July, and could cause the Euro to strengthen substantially.
For now, though, the “fix” seems to be in for a rate cut in June, with all economists in a recent Reuters poll saying that would happen. The market is pricing in nearly a 100% chance of it as well. Therefore, a potential change in expectations would likely be significant for the markets.
Where there is Room for Change
Where there is room for discussion is for after June, and what the ECB could signal at the meeting about subsequent rate cuts. The majority of economists say rate cuts, and the markets are pricing in around a two-thirds chance of that happening. Meaning that a faster decline in the inflation rate has the ability to shore up rate cut expectations for later in the year and marginally weaken the Euro. On the other hand, if the inflation rate is above expectations, but still lower, then the market could cut the chances of a second rate cut and bolster the Euro a bit.
The market could make up its mind about what to expect out of the inflation data with the release of French figures on Friday. That’s because it is the odd one out in the current environment, even as it is the second largest economy in the Eurozone. France is expected to see its inflation tick up to 2.4% from 2.2% prior. As long as it doesn’t rise significantly, the market might still be convinced that the overall rate will keep going down, as France has a particularly low inflation rate within the shared economy.
Setting the Expectations in Order
Eurozone April inflation is actually expected to tick up slightly to 2.5% from 2.4% on the headline, largely due to higher fuel prices during the month. Higher crude prices through the first quarter were passed on to consumers in April, which is seen as temporary. As long as the core rate stays at 2.7% or lowers, then the market could feel safe about the coming rate cut.
Though it should be noted that the ECB is not under any obligation to follow the core rate over the headline rate. That means the hawks could have some ammunition to argue for waiting one more month. So, in the end, the final reaction could come down to what components are seen driving inflation the most and whether they are understood to be temporary or not.
