Another week of tough going for US equities, declining for the 4th week in succession to be down in 6 of the last 7 weeks. A catalyst to swing sentiment remains elusive amid tariff uncertainty and growth concerns, as highlighted by improved inflation data out of the US this week. Price action suggests positioning in European equities may now be stretched, and the same argument could be made for the EURUSD that trades just below 1.09 at pre-US election levels. Attention next week will focus heavily on the Fed's policy meeting. While rates will be left on hold, more dovish signalling on the current outlook for 2 cuts in 2025 to counter uncertainty in the US economy may revive risk sentiment. Domestically, February labour force data is the highlight.
A positive surprise on US inflation failed to improve sentiment, highlighting nervousness around the looming impacts of tariffs on prices and economic growth. February data for consumer and producer prices came in below consensus across the board, contrasting with the upside surprises seen in January. Headline CPI (0.2%m/m) eased from 3% to 2.8%yr and the core rate (0.2%m/m) was 3.1%yr in from a prior figure of 3.3% - all outcomes printing 0.1ppt below expectations. But enthusiasm around the report was subdued; partly because estimates of the Fed's preferred core PCE deflator based on the CPI inputs are around 0.3%m/m - a little firmer than wanted.
Additionally, inflation softened on declines in some of the more volatile areas of the basket, notably fuel (-1%m/m) and airfares (-4%m/m). Markets are also wary that goods inflation (0.6%yr) is off cycle lows and will be subject to tariff risk. Pipeline inflation also surprised to the downside: producer prices (0%m/m) slowed from 3.5% to 3.2%yr (vs 3.3%) and from 3.6% to 3.4%yr (vs 3.5%) on a core basis; however, uncertainty remains around how firms' pricing decisions will respond to the uplift in import costs from tariffs.
Germany's plans to overhaul its fiscal rules have remained in focus in Europe, as has progress towards a Ukraine-Russia ceasefire. The annual ECB Watchers conference was also held during the week. ECB President Lagarde spoke of how an increasingly uncertain backdrop will require greater flexibility in the monetary policy framework to respond effectively to shocks. In the speech, Lagarde also outlined how the ECB is thinking through the impacts of fiscal reform and a trade war. With both upside and downside risks to inflation identified, the ECB's tone on policy is likely to become increasingly more cautious.
In Australia, consumer sentiment responded positively to the RBA recent rate cut with the Westpac-MI Index lifting by 4% in March. Sentiment (95.8) is the least pessimistic it has been since 2022 on the eve the RBA's tightening cycle. The tentative signs of improvement in household consumption reported in the Q4 National Accounts (see here) could extend through Q1 if better sentiment is able to sway purchasing decisions. The NAB Business Survey painted a less constructive view; business confidence (-1) fell sharply in February while business conditions (+4) - despite improving - remained below average. The report highlighted that margin pressures are weighing on profitability, in turn weakening confidence.
