Euroland exhibited all of the expected problems from the recent negative shift in geopolitical events on Europe’s border. Consumer confidence indicators all turned far more negative from individual countries, and that culminated in a huge drop in Euroland consumer confidence in March to -18.7, from -8.8 previously. There were a set of better-than-expected provisional March PMI indices for manufacturing and services, but both still fell from readings in February, and the IFO (Information and Forschung, Germany’s institute for economic research) business climate index fell to its lowest level since July 2020. The concerns over fuel and energy supplies, raw material prices, shipping disruptions and order visibility may continue to worsen over the coming months, unless there is a significant improvement in both the geopolitical and Covid situations.
Indeed, the Euroland economy remains vulnerable to these risks, which may continue to dissuade the European Central Bank from tightening monetary policy much, if at all. The next round of EU economic forecasts isn’t due until late April or early May, and the downgrade to 2023 growth might be of greater interest to markets than any shorter-term growth downgrades, in my view. So, whilst markets still view a hike in the Euroland deposit rate back to zero by the end of the year as likely, I suspect the ECB might tread more cautiously.
This week’s inflation releases from Germany, France, Italy and, at the end of the week, Euroland are already expected to report an additional overshoot in headline inflation rates in March. The only question is by how much more. Consensus forecasts suggest that the Euroland aggregate rate will rise from 5.8% to 6.7% year-on-year. That’s only a little different from rates in the UK for February, and by the time the UK data for March is published in April, I think it’s likely inflation in the UK will have topped Euroland rates. And that’s despite the Bank of England having already hiked three times.
The EUR is still struggling for sustainable gains and made little headway against the USD or GBP over the course of the last week. The figures from Euroland inflation this week could prompt additional interest rate hike expectations in the short term, and consequently we could see the EUR make some gains against other majors, but I doubt those gains will prove sustainable. The risk appetite environment remains broadly positive, which is a surprise, especially as the geopolitical risks are more likely to worsen than improve in the near term, in my opinion.