goods inflation

Italian inflation resumes its declining path in May. The headline measure is still being driven by prices of energy-related goods. Interestingly, core inflation posted the second consecutive minor decline, but we don’t expect it to accelerate in the short run.   Energy still in the driving seat The preliminary estimate of May‘s Italian inflation shows a resumption of the decline in the headline measure after April’s rebound. Headline inflation was down to 7.6% in May (from 8.2% in April), driven mainly by a decline in the non-regulated energy component and, to a lower extent, by inflation declines in “other goods”, transport services and non-fresh food, which more than compensated increases in fresh food (very likely weather related) and housing services.     Expect a faster decline in goods inflation than in services The decline in headline inflation, broadly in line with our expectations, confirms that the normalisation of the inflation path is a gradual one, notwithstanding recent sharp falls in the energy component driven by lower gas prices. The sharp decline in producer price inflation in April (down to -1.5YoY from +3.7% in March) suggests that a more marked decline in the goods price inflation is building in the pipeline, which might show up in the CPI components already in the third quarter.   The deceleration in the services component looks set to be slower, also courtesy of a prolonged re-opening effect which could intensify as we enter the hot tourism summer season.   The pricing intention components of business surveys seem to confirm such a pattern, with softening price increase intentions already in place for some months among manufacturers and only a tentative hint in of a decline among service providers in May.   Tentative hints of a declining trend in the core measure Interestingly, the core measure, which excludes energy and fresh food, was marginally down to 6.1% YoY in May (from 6.2% YoY in April), the second decline in a row. A tentative hint to a new trend, likely favoured by slowly adjusting wage dynamics.   Consumption developments will affect the speed of the inflation decline All in all, today’s inflation release comforts our view that the declining path for inflation is set, but that will be a gradual one. As we have seen earlier today in the GDP release, Italian households have been reluctant to adjust down their consumption levels to unfavourable developments in disposable income.   To be sure, resilient employment has helped weather the shock, but we suspect that the saving ratio has reached too low a level (around 5%) for Italian historical standards, which could prove hard to sustain. A marked deceleration in consumption might eventually kick start a more marked deceleration in the core component.   We are currently forecasting average Italian inflation at 6.3% in 2023 and 2.4% in 2024.

The services sector is still thriving, however, and enjoying the post-pandemic shift from goods to services. Services most affected by lockdowns are currently experiencing much faster price growth than other services or goods. While the upcoming summer holiday period could still fuel service price inflation, we did see a decline last month. The drop was largely due to cheaper public transportation tickets in Germany, however, so it seems too early to call a significant improvement in services inflation just yet. Finally, services inflation traditionally shows a much stronger correlation with wage growth than goods inflation. With wage growth trending up and probably coming in at around 5% year-on-year in the eurozone, services inflation remains the largest problem for core inflation and the ECB.   Still, a key question remains over how long the divergence between goods and services inflation can last. Historically, we don’t see much evidence of an extended difference between the two. Goods inflation typically leads services inflation by approximately six months, which means that the peak in the former from February suggests that the latter is unlikely to remain elevated for the rest of the year. If we are right and the post-pandemic shift ends after the summer holiday period, we could see services inflation starting to come down before the end of the year.   Core inflation set to trend down from here on out While services inflation continues to see some upside risk for the months ahead, core inflation overall looks set to trend down on the back of slowing goods prices. Even services inflation could already be trending down, but perhaps not as fast as policymakers would like it to. When looking at selling price expectations for sectors that sell most to consumers, we see that there has been a steady downturn in the number of businesses intending to raise prices. This generally correlates fairly well with core inflation developments seven months later, which would point to a significant slowdown in the core rate. At the current juncture, experts and central bankers will be hesitant to make an outright call for a sharp drop in inflation. The latest track record of inflation forecasting is simply not on their (or our) side. Nevertheless, as much as it was once obvious that the era of low inflation had to end at some point, it's now clear that the short period of surging inflation will also cease sooner or later. Historical evidence and the latest developments in both goods and services give enough comfort to expect both headline and core inflation to decline. We currently expect core inflation to drop below 4% at the end of the year and for it to fall to 2.5% by mid-2024. The risks to that outlook seem to be fairly balanced, with more stubborn core inflation on the back of faster wage growth and a faster drop on the back of weak goods inflation both decent possibilities.        

Poland’s retail trade improves as goods inflation eases further The decline seen in Poland's retail sales moderated in June as the implied retail deflator subsided further. The domestic economy most likely reached the bottom in the first half of the year, and we should see some recovery in the second half. For 2023 as a whole, we continue to count on GDP growth of around 1%, with risks tilted to the downside.   Real retail sales of goods fell 4.7% year-on-year in June (consensus: -5.0%), following a 6.8% YoY decline in May. Seasonally adjusted data point to a 0.6% month-on-month increase in sales, following a decline of more than 1% in May. On an annual basis, the deepest decline was in the category of newspapers, books, other sale in specialised stores (-17.6% YoY). The only category where we did not observe a decline in sales volume was that of pharmaceuticals, cosmetics, orthopedic equipment (0.0% YoY). The implied retail sales deflator maintained a downward trend and fell to 7.1% YoY from 9.2% YoY in May. We've now seen almost a full set of monthly data for the second quarter of the year, with the year-on-year dynamic of industrial production, construction output and retail sales all coming in softer than seen in the first quarter. The annual pace of GDP in the second quarter was not significantly different from what we saw in the first. The scale of the decline in household consumption most likely deepened, and the consumption recession – along with falling energy commodity prices – is one of the factors currently driving disinflation. The domestic economy most likely reached the bottom of the current business cycle in the second quarter, and we should see some recovery in the second half of the year – albeit at a rather sluggish pace. A key element to note is the decline in inflation and the recovery of real household purchasing power. A narrowing foreign trade balance, which translates into a positive contribution of net exports to GDP, will continue supporting growth. It is much more difficult to assess the impact of changes in companies' inventory adjustments on activity. In 2022, this was a supporting factor for GDP (unblocking supply chains), but is now clearly weighing on economic growth. For 2023 as a whole, we continue to count on GDP growth of around 1%, with downside risks dominating.

EUR: Markets too dovish? Yesterday’s set of data releases in the eurozone showed the growth and inflation side moving in diverging directions. The euro area grew slightly more than expected, at 0.6% year-on-year (0.3% quarter-on-quarter) in the second quarter, while inflation slowed in line with consensus from 5.5% to 5.3% in July. Core inflation was, however, unchanged at 5.5%. The most interesting dynamic in inflation, and one that the ECB will likely follow closely, is related to service price pressure. While goods inflation continues to ease, service price pressure has kept mounting in line with wage growth and stronger demand.   In our view, yesterday’s figures leave the door open for another hike by the ECB before the end of the year, even in September. Markets, however, remain reluctant to endorse this scenario and only price in 17bp of tightening by December, likely having read last week’s ECB messaging as a dovish tilt. It is possible investors will want to hear more hawkishness from ECB members before aligning with the data’s indications and fully price in another hike. However, August is a quiet month for ECB speakers: we’ll hear from the dove Fabio Panetta later this week, and that will hardly help. EUR/USD should be primarily driven by the dollar leg and US data for the remainder of the week, and there are some downside risks to the 1.0900 handle.

According to Franklin Templeton, in his day, Federal Reserve (Fed) Chairman Alan Greenspan was (in)famous for his irascible obscurity—often speaking without being fully understood. In this year’s much-anticipated speech at the Fed’s annual central bankers’ gathering in Jackson Hole, Chairman Jerome Powell appears to have employed Greenspan’s speechwriter. Powell said a lot about the economy and inflation, but he obscured a great deal about future Fed policy. Yet beneath the (intended?) fog of his remarks was a worrisome message for devotees of soft-landing scenarios. Fasten seatbelts—the arriving passengers won’t enjoy a view of the majestic Tetons and should brace for a bumpy landing.    In his day, Federal Reserve (Fed) Chairman Alan Greenspan was (in)famous for his irascible obscurity—often speaking without being fully understood. In this year’s much-anticipated speech at the Fed’s annual central bankers’ gathering in Jackson Hole, Chairman Jerome Powell appears to have employed Greenspan’s speechwriter. Powell said a lot about the economy and inflation, but he obscured a great deal about future Fed policy. Yet beneath the (intended?) fog of his remarks was a worrisome message for devotees of soft-landing scenarios. Fasten seatbelts—the arriving passengers won’t enjoy a view of the majestic Tetons and should brace for a bumpy landing. The initial market response has been minimal. Equity and bond prices bounced around immediately after the speech, but diverged somewhat by the close as stocks finished higher while bond yields rose. We’re not sure that’s right and here’s why:   Powell’s key points To begin, Powell’s speech was a somewhat dull resuscitation of recent economic data, with a focus on the details of core personal consumption expenditures inflation (the Fed’s preferred measure). Having noted welcome declines in goods inflation and a probable decline in shelter inflation, Powell emphasized that non-housing core services inflation has been less responsive to either changes in the economy or to Fed tightening. Powell also remarked that current Fed policy is already “restrictive,” meaning that the real (inflation-adjusted) fed funds rate is above broadly accepted ranges of what constitutes its “neutral” level. But Powell carefully avoided saying what comes next. He noted that it could be a longer pause or additional rate hikes. But by failing to mention rate cuts, he sent his clearest message of the speech, namely that the Fed is either on hold with an already restrictive stance or might hike rates further. Easing anytime soon, however, is off the table.   Slave to dead economists? That’s the clearest message from Powell. Parsing his other “Greenspan-esque” remarks, it seems the Fed is sticking to the view that the achievement of its 2% inflation objective requires “slack” in the economy. “Slack” is, of course, a euphemism for job losses. That idea stems from the Phillips Curve—first developed over 60 years ago—which purports to show an inverse relationship between inflation and unemployment (i.e., higher unemployment leads to lower inflation). But many economists are less certain. The Phillips Curve has never depicted a stable relationship between joblessness and inflation, and in recent decades it has been even less reliable. In fact, many measures of US inflation have fallen significantly this year without the unemployment rate rising. However, it seems as though most Federal Open Market Committee members side with Powell’s Phillips Curve approach. If so, then the Fed is indeed laying down a marker for investors. Specifically, the implication is that policy must remain restrictive (or become more restrictive) until the unemployment rate rises. Also, the Fed’s threshold level of “slack” appears to be at least a 4.0% US unemployment rate (up from 3.6%). If so, the Fed is signaling that despite (or because of) the fog that surrounds our understanding of inflation dynamics, a bumpy landing is an unavoidable necessity.  

Italian inflation continued to decelerate in August The August inflation release provides comforting signals of a broad-based deceleration in inflation, including the core measure. The trend looks set to continue until year-end, at a pace which will be affected by residual base effects. We stand by our 6.4% forecast for 2023 HICP inflation.   Goods and services both decelerate The preliminary estimate by the Italian National Institute of Statistics (Istat) of August consumer prices confirms that inflation is on a solid decelerating path. The headline measure was down to 5.5% (from 5.9% in July), broadly in line with expectations, driven by the non-regulated energy component, recreational services, fresh food, transport services and durable goods, only partly compensated by housing services and regulated energy goods. The statistical carryover for 2023 headline inflation now stands at 5.7%. Both goods and service inflation decelerated to 6.4% and 3.6%, respectively, and food inflation, at 9.6% in August, fell below double digits for the first time since July 2022.   Core inflation falls Core inflation, which strips out energy and fresh food, and is a key indicator in the eyes of the European Central Bank, also sent encouraging signals, falling to 4.8% from 5.2% in July, confirming the deceleration pace seen since June. This reflects the deceleration in services, not yet impacted by the recent acceleration in hourly wages (at 3.2% year-on-year in June)   Further declines in inflation expected... As the pace of the decline in headline inflation is still being set by the energy component, we should be aware that substantial base effects have yet to play out as a decelerating factor over the autumn. Indicators such as import prices and producer prices continue to point to softer headline inflation ahead. Import prices contracted by 9.8% in June and producer price inflation, at -5.5% YoY in June, has been in negative territory since April. The latter is still driven by the energy component (-26.2% YoY in June), however stripping out energy and construction, the PPI inflation read in June of 2% confirms a clear declining trend.   ...but the pace will depend on a combination of factors If the pricing pipeline is sending encouraging signals, other indicators coming from August business surveys deserve attention. For the first time since September 2022, the manufacturers’ pricing intentions balance rose in August from the previous month and increased in services for the second consecutive month. The only area where the deceleration in price increase intentions remains in place is the retail sector. This is a warning signal that the current pace of inflation deceleration, particularly at the core level, cannot be taken for granted. The wage cost variable will likely have a say in the process. Here, indications are mixed. If some more wage concessions look likely over the next few months as a consequence of past inflation surprises, labour market tightness might loosen a bit. July labour market data, also released earlier today, offer some tentative evidence of this. For the first time over the last eight months, employment declined from the previous month and the unemployment rate edged up to 7.6% (from 7.4% in June). The Italian labour market is possibly finally responding to cyclical developments. After today’s inflation release, we confirm our forecast for average HICP inflation for 2023 at 6.4% YoY.

KEY MESSAGES  We think a third straight 0.2% m/m core CPI print that lowers the y/y rate to 4.3% (from 4.7%) will help firm up a pause at the coming September FOMC meeting.  While Fed officials will likely look through a gasoline-driven 0.6% m/m rise in headline CPI, higher energy prices could risk amplifying inflation expectations, which generally remain anchored but at the high end of their ranges.  We expect a continued moderation in shelter inflation and another contraction in goods prices to keep core inflation relatively subdued. We anticipate little (if any) improvement in non-housing services inflation, which we see continuing to move sideways on a y/y basis.  We see a 0.3% m/m core CPI print as more likely than 0.1%, given large contractions in several “revenge spending” categories such as airfares over the past couple of months that we think will be hard to repeat in August.   Finally, a cool summer on the inflation front Summer 2023 has been one of cooling rather than heating, at least when it comes to inflation. With core CPI having increased by annualized rates of 1.9% in both June and July, a third straight such print should help firm up policymakers’ confidence in an emerging disinflationary trend. As in June and July, we expect goods and shelter inflation to help moderate core inflation for August. Wholesale usedvehicle prices are pointing to another decline for retail prices, while higher inventory levels suggest more downside for nonvehicle core goods inflation. Meanwhile, the slowdown in market rents should continue to feed into overall shelter inflation.   On the mend, but a “long way to go”: Though moderation in these two categories – goods and shelter – may persist in August, we expect little to no improvement in the key non-housing services inflation subset. Specifically, we look for another 0.3% m/m print that should leave the y/y rate steady at 5.3%.   We do not anticipate material improvement in non-housing services inflation without a corresponding softening in the labor market. Evidence is accumulating in that direction – e.g. openings are falling as wage growth is slowing – but we think further material loosening is needed before clearing disinflation for this sticky subset of prices takes hold. Fed Chair Powell hinted at a similar view in his Jackson Hole speech, noting that while the unwindings of both pandemicrelated demand and supply distortions “are now working together to bring down inflation, the process still has a long way to go, even with the more favorable recent readings.”    

Italian inflation sees a sharp fall on favourable energy base effects The decline in Italian inflation in October was stronger than expected, bringing the headline inflation rate temporarily below the 2% threshold. While we could see a rebound over the winter, this is good news for real disposable income developments.   Headline inflation surprises to the downside, driven by a favourable base effectWe had anticipated a steep fall in Italian headline inflation for October – but the actual data has turned out even stronger than expected. The preliminary estimate disclosed by the Istat shows that headline inflation fell to 1.8% year-on-year (from 5.3% in September), the lowest level since July 2021 and helped by huge base effects in the energy components. The bulk of the decline is explained by non-regulated (to -17.7% from +7.5% YoY) and regulated (-32.9% from -32.7% YoY) energy goods, but food components also provided a solid contribution. These falls trumped the increases in housing and transport services. Core inflation (which leaves out energy and fresh food) also decelerated to 4.2% from 4.6% in September, and now lies well above the headline measure as expected. Behind this, there is a re-widening between services inflation at 4.1% and goods inflation (+0.1%).   Inflation to return above 2% over the winter Looking ahead, the energy component will unlikely be able to act any further as a drag and we expect inflation to return back above 2% over the winter. The pace at which the core component will be able to decelerate will crucially depend on consumption developments. As shown by the preliminary estimate of third-quarter GDP also released this morning, the Italian economy stalled over the quarter, with a negative contribution of domestic demand (gross of inventories) compensated by net exports. Thanks to a resilient labour market and decent wage growth, we suspect that consumption might not have acted as a drag in the third quarter, and could gain potential support over the winter from the impact of declining inflation on real disposable income. This could potentially slow the decline in core inflation through the services component. All in all, after today’s release we're revising down our inflation forecasts to 5.9% for 2023 and 2.3% for 2024.

Italian industrial production was stable in September September's industrial production data and October survey data suggest that the soft economic patch will remain in place over the fourth quarter, with downward pressure on goods as the only positive fallout. The soft patch in Italian industry continued in September, according to Istat’s data. Seasonally-adjusted production was flat on the month, and the working days adjusted measure was down 2% on the year. In September, production was 3% lower than at the pre-Covid peak. A quick look at big industry aggregates shows a sharp monthly decline in consumer goods (-2.2% month-on-month), offset by increases in investment goods (+1.5% MoM), intermediate goods (+0.3% MoM) and energy (+1.1% MoM). The manufacturing breakdown shows that previous patterns in yearly changes have been broadly confirmed: sectors which had been particularly penalised by supply chain disruptions such as the transport equipment industry continued to rebound, while those more exposed to developments in construction activity, such as wood and non-metal mineral products, continue to suffer. The view on the quarter, a modest 0.2% gain in production in the third quarter over the previous one, does not add anything relevant to what we already knew from the value added provided by the preliminary estimate of 3Q23 GDP. Looking ahead, high-frequency confidence data for October suggests that manufacturing weakness will likely remain in place over the last quarter of 2023. Softening orders are reportedly weighing on current and expected production, pointing to a possible negative contribution of manufacturing to value added generation over the last quarter of 2023. If this is confirmed, the stagnating economic environment looks set to persist over the fourth quarter, with a small negative growth reading remaining a possibility if services take a downward direction. The one positive feature of the ongoing manufacturing soft patch is that this adds downward pressure to goods inflation, possibly bringing forward gains in real disposable income.

Continued improvement in Turkey’s underlying inflation trend Annual inflation has remained at 61-62% for a third consecutive month with a better-than-expected monthly November figure. The underlying trend continues to improve. With another better-than-expected monthly reading at 3.3% (vs the consensus at 3.9% and our call at 3.8%), annual inflation in Turkey recorded a slight increase to 62% from 61.4% a month ago. The data reflect elevated upward pressures in services and the impact of natural gas prices. October PPI, on the other hand, stood at 2.8% MoM, translating into 42.2% YoY. The decline in annual PPI from close to triple digits at the end of last year shows improvement in cost pressures despite a Year-on-Year increase in the Turkish Lira equivalent of import prices lately due to commodity price developments and exchange rate increases. Core inflation (CPI-C) came in at 1.96% MoM, inching up to 69.9% on an annual basis on the back of pricing behaviour, exchange rate developments, adjustments in administered prices and inertia in services. However, the underlying trend (as measured by 3m-ma, annualised percentage change, based on seasonally adjusted series), which dropped in October, maintained its recovery in November with a continued decline in not only the core but also the headline rate of goods and services inflation.   Inflation outlook (%)   In the breakdown, all main expenditure groups, with the exception of clothing, positively affected the headline: Among them, housing turned out to be the major contributor with 1.44ppt due to natural prices as households exceeded the free natural gas usage limit. Accordingly, energy inflation jumped to 21.2% from 11.6% a month ago. This was followed by food with 0.74ppt, though annual group inflation moderated to 67.2% (vs the CBT assumption at 66.7% in the latest inflation report release) on the back of both processed and unprocessed food. However, price pressures in processed food were still high, with the second-largest November increase in the current inflation series. 33ppt contribution, on the other hand, was attributable to alcoholic beverages and tobacco with adjustments in cigarette prices. On the flip side, clothing recorded a slight price decline on the back of seasonality. As a result, goods inflation moved slightly up to 52.1% YoY, while core goods inflation receded to 52.2% YoY. Annual inflation in services, which is significantly influenced by domestic demand and wage hikes, maintained its uptrend and reached another peak at 89.7% YoY, attributable to the continuing rise in rents, transportation and telecommunication services.   Annual inflation in expenditure groups   Overall, annual inflation has remained in the 61-62% range for the last three months as pass-through from the post-election adjustment in FX, wages and taxes is reflected in the prices. The monthly trend of inflation may continue to improve if:  currency stability is maintained, adjustments in wages and administered prices prioritize inflation concerns, the impact of geopolitical issues on oil prices remains under control  domestic demand sustains its moderation path. We expect inflation to remain elevated until mid-2024, with further increases above 70% on seasonal effects in January and unfavourable base effects in May. The second half of next year will likely see a sharp downtrend – reflecting this year’s high base and further impact of tighter policy, pulling inflation to 40-45% by the end of the year. At the November MPC meeting, the CBT raised the one-week repo rate to 40.0%, providing guidance that: the pace of monetary tightening would slow the tightening steps would be completed in a short period of time, the monetary tightening required for sustained price stability would be maintained as long as necessary. Accordingly, we expect that the interest rate hike process will be completed at 45.0% with more limited increases of 250 basis points in December and January meetings. However, better-than-expected inflation readings and currency stability may also lead the bank to end the hiking cycle after a single 250bp hike.

Services PMIs expected to remain soft, as RBA leaves rates unchanged By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a rather lacklustre start to the week, weighed down by a rebound in the US dollar as well as weakness in basic resources and energy prices, as investors took a pause after the gains of the past couple of weeks.  US markets fared little better, sliding back in the face of a modest rebound in yields as investors hit the pause button ahead of this week's jobs data, which is due at the end of the week, with markets in Europe set to open slightly weaker this morning.   Earlier this morning the RBA left rates on hold at 4.35% after last month's decision to raise rates by another 25bps. Despite last month's surprise decision to raise rates today's decision acknowledged that inflation was now starting to moderate in goods even as concerns remained about services inflation. Nonetheless, despite this acknowledgement that inflation appears to be slowing there was little indication that the central bank was considering another rate move in the near term. Last month's decision to raise rates was driven by concern about domestic price pressures and while today's decision to hold was a relief there was little sign that a policy change in either direction was being considered with Governor Bullock acknowledging significant uncertainties around the outlook.   Nonetheless today's decision to hold came against a backdrop of a month which has seen 2-year yields decline almost 40bps from their 4.52% peaks on the 1st November, as markets surmised the central bank is now done, with the Australian dollar falling sharply.   The recovery in US yields yesterday appeared to be because of the possibility that the declines seen over the past few days may have been a little too much too quickly, given Powell's comments on Friday last week when he pushed back on the idea that rate cuts were on the cards for the first half of 2024.   There is certainly an element of the market getting ahead of itself when you look at a US economy that grew at 5.1% in Q3 and still has an unemployment rate of 3.9%. The same sadly cannot be said for Europe where the French and German economies could well already be in recession.   While recent manufacturing PMI data in Europe suggests that economic activity might be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation. This in turn is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4.   The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have declined after Italy fell sharply in October to 47.7, while Spain was steady at 51.1, although both are expected to show slight improvements in today's November numbers with a rise to 48.3 and 51.6 respectively.   The UK economy also appears to be showing slightly more resilience where there was saw a recovery into expansion territory in the recent flash numbers to 50.5, while earlier this morning the latest British Retail Consortium retail sales numbers for November, which showed that consumers remained cautious despite the increasing number of Black Friday deals ahead of the Christmas period as retailers looked to tempt shoppers into opening their wallets. Like for like sales in November rose 2.6%, the same as the previous month, with sales of high value goods remaining soft, with consumers preferring to go with lower ticket and essential items spend of food and drink, health and personal care.      In the US we also have the latest October JOLTS job opening numbers which are expected to show vacancies slow from 9.5m to 9.3m, while the latest ISM services survey forecast to show a resilient economy.   The headline is expected to show an improvement to 52.3, with prices paid at 58 and employment improving to 51.4 from 50.2 due to additional holiday period hiring. Gold prices are also in focus after yesterday's new record high saw a sharp reversal with prices closing lower in what looks like a bull trap and could see prices pause for a period of time and retest the $2,000 an ounce in the absence of a rebound.     EUR/USD – continues to look soft dropping below the 200-day SMA at 1.0825, with a break of the 1.0800 having the potential to retest the 1.0670 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 area has seen the pound slip back with support at the 1.2590 area currently holding. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – found support at the 0.8555 area for the moment, but while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – found some support at the 146.20 area in the short term, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 15 points lower at 7,498   DAX is expected to open 9 points higher at 16,413   CAC40 is expected to open 3 points lower at 7,329

Eurozone PMIs show very tentative signs of bottoming out The eurozone economy continues to trend around 0% growth and there are no signs of any imminent recovery. Price pressures are still increasing for the service sector, which provides another argument for the ECB not to hike before June. How you read today’s PMI release for the eurozone reveals whether you’re an optimist or a pessimist. The increase from 47.6 to 47.9 in the composite PMI for January cautiously shows signs of bottoming out but also still indicates contraction. We also note that France and Germany saw declining PMIs, making the increase dependent on the smaller markets. Manufacturing price pressures remain moderate despite the Red Sea disruptions, but the service sector indicates another acceleration in input costs. To us, this shows that the eurozone economy remains in broad stagnation and that risks to inflation are not small enough to expect an ECB rate cut before June. The eurozone continues to be plagued by falling demand for goods and services, although new orders did fall at a slower pace than in recent months. Current production and activity were weaker than in recent months, though, suggesting that January started with contracting output still. The slowing pace of contracting orders does suggest that there is a bottoming out happening though. Whether this is enough to show positive GDP growth in the first quareter depends on February and March. In any case, GDP growth is so close to zero that we still qualify the current environment as broad stagnation anyway. The PMI continues to show some concern around inflation. Even though demand remains lacklustre, services cost pressures are on the rise again due to higher wage costs which are being transferred to consumers. Cost pressures on the goods side remain low despite Red Sea disruptions as energy prices trend lower and demand overall remains weak. This also means that goods inflation continues to trend down according to the survey. So, despite Red Sea problems prominently featuring in the news, inflation concerns currently stem more from services than goods, interestingly. For the ECB, enough worries about inflation not trending down to 2% quickly still remain. We think that makes a first cut before June unlikely.