Daily Agenda: Investors Keep Flocking to Europe

U.K. posts zero inflation; PMI data for Europe picks up; new polls show approval plummeting for Brazil’s government.


A reversal for the dollar and oil have not yet quenched investors’ appetite for euro-denominated risk assets. With consensus view that Federal Reserve tightening will commence in summer despite recently hawkish language, from a market sentiment standpoint, it appears that there is little that stands to compete with the quantitative easing program of the European Central Bank. European equities rose this morning across most major indexes.

Activity cools in China. Chinese markets reacted to a sharp contraction in HSBC manufacturing purchasing managers’ index data released today, as soft activity leads more investors to conclude further easing from the People’s Bank of China is likely. According to the report the manufacturing sector activity levels reached an 11-month low, with the index registering at a contraction at 49.2.

U.K. inflation rate at zero. Consumer and producer inflation data for the U.K. in February released today showed flat price growth at the cash register, the lowest official reading since 1989; unofficial records suggest since 1960. Core levels came in at an anemic 1.2 percent year-over-year. Prices at the factory gate remained depressed on weaker commodity input costs.

European PMI shows signs of economic rebound. Purchasing manager index levels released by Markit today show that activity in March recovered at a brisk pace in the primary euro zone economies excluding France, where manufacturing-specific levels remained below consensus forecasts. German composite levels were at their highest levels since July, up from 53.8 last month to 55.3 in March, while manufacturing output-specific figures were the highest in nearly a year.

Japan will not join AIIB. In a victory for the U.S. government, Japan’s Finance minister Taro Aso today announced that the nation will not participate as an initial member of China’s fledgling Asian Infrastructure Investment Bank, despite comments in prior weeks that were positive on prospects for the entity. U.S. leaders have campaigned against the new bank — largely unsuccessfully — out of concern that it will give rise to increased regional political influence for Beijing.

U.S. inflation data to be released. CPI for February is on deck in the U.S. today with forecasts for a marginal rebound after a sharp month-over-month contraction in January. Critically, January measures showed the impact of declining energy costs, with the gasoline subindex declining by double-digit measures for the month.


Rousseff approval rating plummets. In a poll published yesterday a significant majority of Brazilians questioned had a negative view of the administration of President Dilma Rousseff. The government in Brasilia continues to reel from allegations of corruption related to state-operated oil company Petrobras, sparking protest marches throughout the country.

Portfolio Perspective: Mexico’s Inflation Deceleration Likely Over, but Core Inflation to Stay Below TargetDev Ashish, Société Générale

Headline inflation in Mexico fell marginally to 2.97 percent year-over-year during the second half of February, while core inflation remained unchanged. We expect headline inflation to have moved up to 3 percent year-over-year (0.21 percent month-over-month) through mid-March, while core inflation likely rose by 0.2 percent month-over-month. Post the sharp decline in inflation in January and thanks to the end of long-distance telephone charges and price falls in several services categories, inflation seems to have stabilized at around 3 percent, which is Banxico’s target. Core inflation will likely remain below 3 percent this year, however, primarily due to low inflation in the housing and health and personal care categories.

On a structural basis, higher growth potential and low peso pass-through are likely to keep inflation in check, although sharp depreciation in the peso is an upside risk to inflation. As a result, growth in aggregate demand and labor market movements will remain the key cyclical drivers of both inflation expectations and monetary policy in the medium term. If actual growth fails to keep pace with potential growth because of a rise in the labor force, there would be some downside risk to our inflation forecasts over the medium term. On the other hand, higher employment growth or a fall in the unemployment rate will likely push wage growth higher, which could push medium-term inflation above Banxico’s target.

Dev Ashish is a Latin America economist for Société Générale in Bangalore.