European consumer prices continue to fall

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Deflation

Janet Yellen, Chair of the US Federal Reserve (the Fed), had the greatest influence on the global financial markets this past week, but news on Europe’s inflation rates will presumably turn out to be even more important for the future. The question is, how will the European Central Bank (ECB) respond to the relatively persistent deflation?

We do not expect much corporate news in the coming week, as the first results will come trickling in only in a week or two. Ben Steinebach Ben Steinebach Head of Investment Strategy

Janet Yellen stated in a speech that the Fed will be very cautious in further raising the Fed funds rate. The US economy may be doing reasonably well and inflation may even be slightly higher than the Fed’s estimates, but there are still various risks on the international front, relating to a renewed dip in oil prices and hiccups in the Chinese economy. If these risks transpire, the US economy will suffer. The financial markets responded enthusiastically to Ms Yellen’s statements, but the Fed’s policy committee had other news. James Bullard, President of the St. Louis Federal Reserve, said last week that a rate hike could be closer than generally expected. Interest rates could be hiked if, this afternoon, employment were to rise more steeply than expected (this figure was unknown at the time of publication of this blog).

The eurozone still faced deflation in March. Prices were 0.1% lower than a year ago, compared with a 0.2% decline in February. The recovery of oil prices, since the low of USD 28 per barrel in January, is yet to be reflected in consumer prices. There was also a strong upward effect on price movements because Easter fell early this year (affecting prices of hotels and restaurants, for example). The underlying price movement is even weaker than suggested by the total inflation figure. The ECB, which announced a powerful stimulus in March, will presumably continue its policy of quantitative easing. We believe further interest rate cuts are unlikely because the deposit rate, at 0.4%, has basically bottomed out. On a positive note, lending in the eurozone – especially to businesses – perked up significantly in February and, with the ECB’s announced loans (at low interest rates), the credit channel will remain open for the time being.

The end of an intense quarter

The first quarter of 2016 will go down in history as an exceptionally turbulent quarter. Equity markets initially tumbled, but recovered in the second half of the quarter. Still, many markets are now at significantly lower levels than they were at the beginning of the year. We will only know the final score in a few weeks’ time, when corporate results start to trickle in, but it is already safe to conclude that this was one of the most tempestuous quarters ever for the financial markets. Although the epicentre of turmoil was in China, markets worldwide were hit and gradually other causes than contracting growth of the Chinese economy were sought. Fingers were pointed at falling oil prices and the US economy, which is headed towards a recession. When all indicators internationally began to improve in February, however, markets picked up. Yet equity markets – especially in Europe – closed off the quarter with big losses. Markets in Germany and France declined by 7% and 5.5% respectively, but in Spain and Italy the damage was much worse, at 8.5% and 15.5% respectively. In this light, the AEX got off easily, falling from 442 at the beginning of the year to 383 on 11 February, but it closed on Thursday at 440 points, losing 0.4% on balance. Royal Dutch Shell and ING are heavyweights in the index. The recovery of bank shares in the second half of the quarter, and of oil prices inevitably helped to limit the loss.

Retail and industry in the spotlight

We do not expect much corporate news in the coming week, as the first results will come trickling in only in a week or two. On the macroeconomic front, though, a few interesting numbers will be published, especially on sales by Europe’s retail sector. First, financial markets will focus attention on the development of employment in the US, which will be known by the time you read this blog. We expect 200,000 jobs to be added to the economy in March. All eyes will also be on the February retail sales figures for the European Union as a whole, as well as for France, Belgium and the Netherlands, which will be published on Tuesday. Private consumption should gradually become the trigger of economic growth, and these figures are a good indication of that. The same day will also see the publication of data on the mood among purchasing managers in the services sectors in many countries. These will be the final figures for March. And new data on industrial orders in the US and Germany will also be announced. In Germany, the breakdown of domestic and foreign orders is particularly interesting because of what it says about the country’s export position. The United Kingdom, France and the Netherlands will publish new data on industrial production in February, and Statistics Netherlands (CBS) will also publish this country’s inflation rate for March.

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