Markets week ahead: All eyes on eurozone inflation

By Tina Teng

Published on 26/02/2024 - 08:49•Updated 12:04

Major economies are releasing their manufacturing PMI and CPI data for February this week, as they continue to grapple with inflation.

The NVIDIA-led tech rally has sent both the US and the European markets to their all-time highs, sparking concerns about the sustainability of the market rally and prompting some cautious indicators worth noting.

Firstly, the Fear & Greed Index, which tracks stock market movements and determines if stocks are priced fairly, has surged into the Extreme Greed zone, suggesting the market might be overbought.

Secondly, global government bond yields climbed significantly, implying central banks may not start interest rate cuts as soon as previously anticipated.

This week, keep an eye on important economic updates and events worldwide. Major economies will release their manufacturing Purchasing Managers' Index (PMI) and Consumer Price Index (CPI) data for February.

In the Asia-Pacific (APAC) region, the Reserve Bank of New Zealand (RBNZ) will announce its Official Cash Rate (OCR) decision after pausing rate hikes for four consecutive meetings. Also, finance ministers and central bank governors from G20 member countries will gather in Brazil for a meeting to discuss their economic forecasts.

Europe

The European stock markets have experienced robust movement this year, propelled by rate-cut bets by central banks and Wall Street’s AI frenzy.

The focus for the current week centres on the estimated CPIs and respective manufacturing PMIs for February in the region.

Despite a retreat in inflation, European Central Bank (ECB) officials may remain unconvinced that they should start cutting rates until the latter half of the year.

The Eurozone’s CPI is forecasted to ease to 2.5% year on year in February, down from 2.8% in the prior month. However, this level remained above the ECB’s 2% target level.

Looking at manufacturing, the UK's PMI is expected to remain in contraction territory at 47.1. The index, ranging from 0 to 100, indicates improvement above 50 and decline below 50.

The same is anticipated for major Eurozone countries like Germany, France, Spain, and Italy.

However, there's some good news: while still technically in decline, PMIs for Spain and Italy are predicted to improve significantly, reaching above 49 for the first time since April 2023.

The US

The US economic trajectory may continue to offer evidence for “soft-landing” following the recent tech-led rally.

However, a resilient economy and a record-high stock market may encourage the US Federal Reserve (Fed) to delay its decision to launch a rate-cut cycle. The economic focus will be the ISM US manufacturing PMI and the January Personal Consumption Expenditures (PCE) index this week.

The ISM US manufacturing PMI improved to 49.1 in January, the highest since October 2022, though it contracted for 15 consecutive months. Consensus calls for 49.1 for February, pointing to the 16 straight months of contraction.

Another thing to look out for is the PCE index for January, as it's considered key for gauging inflation rates.

The data cooled below 2% in December, and the core PCE, excluding food and energy, also remained at 2% for the second consecutive month. A further slowing PCE could be a positive signal for Wall Street but the Fed may focus more on the headline CPI from the past two years.

On the earnings front, all eyes are on Zoom Video Communications, Salesforce, and Snowflake, providing insight into the health of US tech companies.

The APAC region

China

The Chinese stock markets offered some positive movement recently after the People’s Bank of China (PBOC) implemented additional stimulus measures to bolster economic recovery. This makes the country’s February manufacturing PMI handy for gauging its economic health, especially during the Lunar New Year month.

While China's manufacturing stayed robust compared to Europe's amid a shaky economic recovery, there's concern that global demand might stay weak, keeping the PMI in contraction. If the data exceeds expectations, it could boost European markets, especially in the luxury and leisure sectors.

As for company earnings, the Chinese tech giant Baidu is scheduled to unveil its fourth-quarter earnings results this week. Often referred to as the Chinese counterpart to Google, Baidu is also developing AI.

The result will offer insightful clues for the Chinese giant’s competitiveness in the AI race.

Japan

Japanese stock markets hit a record high recently, buoyed by the weak Japanese yen and the Japanese government’s pro-investors government reform.

However, the yen weakened to a historic level against the US dollar, leading to speculations that the Bank of Japan may intervene in the foreign exchange market.

The focus for markets this week will be the National Core CPI. The data is expected to ease below 2% for the first time since April 2022, which may further press on the yen and strengthen expectations for a BOJ intervention.

The currency's performance is closely tied to these economic factors, and any intervention by the central bank could have ripple effects on both the domestic and international financial landscapes.

Australia

The ASX 200 failed to secure another weekly gain despite record-breaking momentum on Wall Street, due to disappointing half-year results from big Australian miners.

The decline in iron ore prices weighed heavily on overall market sentiment. This week’s monthly CPI for January will be a key focus for the regional markets, which plays a crucial role in shaping the Reserve Bank of Australia's (RBA) policy stance.

But the data might not be too encouraging, with expectations for a 3.5% year-over-year growth, slightly up from 3.4% last month. Rising inflation could keep putting pressure on the stock markets, especially since the ASX 200 reached a record high earlier this month.

New Zealand

The RBNZ's decision on interest rates could significantly impact New Zealand's economy and its stock market. The RBNZ is known for its cautious stance compared to other developed countries.

Governor Adrian Orr has emphasised the need to control inflation, hinting at future monetary policy tightening.

Economists predict the OCR may increase from 5.5% to 6% this year. While this has boosted the New Zealand dollar, it has also weighed on the stock market.

Investors will closely monitor the central bank's decisions and statements for clues about future monetary policy and its effects on the economy.

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