BRUSSELS Feb 23 Euro zone inflation due on
Friday will be firmly in the sights of financial markets eager
to establish whether the European Central Bank (ECB) has enough
ammunition to ease monetary policy in the following week.
Inflation in the 18-member euro zone unexpectedly slowed to
0.7 percent year-on-year in January, matching a four-year low
set last October and confounding expectations for a rise to 0.9
The ECB cut its main refinancing rate to a record low of
0.25 percent in November and left it at that level at its
meeting earlier this month, but put markets on alert for a
possible move in March.
ECB President Mario Draghi said the Governing Council had
not acted because of the complexity of the situation and the
need to have more information.
The next meeting on March 6 will have new forecasts from the
bank's staff extending into 2016.
Friday's February inflation figure could cause a fine-tuning
of those forecasts, which form the basis of the ECB's monetary
"The big issue is whether they are comfortable with their
medium-term trajectory. That's obviously something that's going
to get revised down a bit ... Next week's reading will in some
sense influence their thinking," said David Mackie, chief
European economist at JP Morgan.
Further country data could mean the January figure being
revised up to 0.8 percent on Monday, but the consensus view is
for a 0.7 percent reading for February.
Commerzbank, which predicted the 0.7 percent figure in
January, sees a further drop to 0.6 percent for February.
Christoph Weil, economist at the bank, said this would prompt
the ECB to reduce its 2014 and 2015 inflation forecasts each by
0.2 percentage points from already low levels of 1.1 and 1.3
"It's a close call, but we see the ECB cutting interest
rates," Weil said, adding Commerzbank's view is that the main
repo rate would drop to a fresh low of 0.1 percent.
The market consensus is for no further cut.
Inflation data will arrive at the same time as unemployment
figures. The typically lagging indicator is expected to show no
improvement in January from the 12.0 percent rate of December.
Across the Atlantic, the debate rages on about whether the
U.S. economy's apparent weakness at the start of this year is
purely a temporary blip caused by an exceptionally cold winter
or something longer-lasting.
Federal Reserve Chair Janet Yellen will testify before the
Senate Banking Committee on Thursday, some two weeks after she
told the House Financial Service Committee that the central bank
would keep on reducing its stimulus.
Lawmakers may ask whether she has a different view on the
weather question, although few expect an abrupt change.
After a week featuring a promising survey of U.S.
manufacturers, but a decline of housing starts, factory activity
and home sales, there will be more data on home prices and
sales, consumer confidence and durable goods orders.
For Nomura's chief U.S. economist Lewis Alexander, the
latter, due on Thursday, is particularly important given that
higher fixed investment by businesses underpins many economists'
outlook of a better rest of the year.
Alexander said some weakness in the first quarter had been
expected, even without the harsh weather, because of a strong
second half of 2013 supported by inventory accumulation.
The jury would be out until a spring thaw on whether the
weakness went beyond the weather and the inventories issue.
"If you look at the breadth of the weakness we've seen in
the last six weeks or so, in things like the retail sales report
and the weakness on payrolls, I think it certainly is consistent
with the notion that there's something bigger going on than just
those two temporary factors," he said.
The weather of course will influence the durable goods data,
such as in terms of capital goods for the construction sector.
In China meanwhile, the economy really is weakening.
Activity in China's factories shrank again in February, a
survey showed, the minor slowdown in the world's second-largest
economy enough to upset markets across the region.
The flash Markit/HSBC Purchasing Managers' Index (PMI),
released last week, dropped to a seven-month low of 48.3 in
February, the second month at a level below 50, indicating
Official PMI from the National Bureau of Statistics, with a
bigger sample size, will provide a further guide on Saturday and
could add to the view of some economists, still in the minority,
who believe China will need to ease policy to support growth of
In Japan, data due on Thursday are expected to show factory
activity accelerated in January, after disappointing
fourth-quarter growth figures cast doubt on the effectiveness of
the aggressive stimulus of Prime Minister Shinzo Abe's year-old
Thursday is also likely to see Japan's core inflation
hovering at five-year highs above 1 percent, but still well
below the Bank of Japan's (BoJ) 2 percent goal.
A Reuters poll last week showed the BoJ is expected to ease
monetary policy further by the summer to help boost the economy
as the effects of the government's stimulus begins to wane.