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HEM: Reality Rolling Doves

• Resilient data keeps rolling back dovish pricing
• Rates do not seem tight enough to require deep cuts
• UK wage growth is too high for import prices to offset
• Excess demand and inflation delay BoE cuts to Feb-25
• The ECB may only delay to Sep-24, closer to the Fed

EA Serving Inflation Resilience

• Flash EA inflation unusually exceeded expectations by only slowing by 0.2pp to 2.58% in February. This outcome matches average forecasts for the month held since Dec-22.
• Resilient services inflation only slowed by 5bps to 3.93%, driving the upside surprise in the headline and core inflation rates, with the latter at 3.1%.
• The ECB will likely look at headline inflation above this pace at its June meeting, with services at 3.5% in our forecast. We still expect it to delay cuts until September.

By Philip Rush

EA Still Stuck in Stagnation

• The flash services PMI’s bounce raised a risk that the Euro area’s stagnation might be ending. However, we still believe that is residual seasonality rather than substance.
• ESI survey data corroborate this sceptical assessment as they were broadly unchanged at levels below the historical average for most sectors and countries.
• Ongoing labour market resilience in the EEI and unemployment data sustains cyclical support for wage costs. Services and retail price expectations remain historically high.

By Philip Rush

Why Neutral Rates are High

• Market interest rates still price a mean reversion, albeit with less imminence than earlier this year. Resilient economic data imply the prevailing neutral rate is higher.
• Slow GDP growth suggests opportunity is low, depressing the consensus view of neutral, but rising time preferences in the post-pandemic regime would also drive rates up.
• We find reasons for this structural shift and are mindful that another regime change is unlikely outside of a recession. This still provides a hawkish anchor to our forecasts.

By Philip Rush