Analysts at Nordea Markets suggest that while momentum in the soft growth indicators has been abating on aggregate, the US has kept pace and outdone the rest of the world in terms of momentum so far in 2018.
Key Quotes
“Especially if we look towards the inflationary momentum, there are good reasons to believe that the current uptrend in US core inflation will continue. We will not be surprised if US core inflation returns to the levels seen between 05 and 07, while US headline inflation could increase to as much as 3% in Q3 this year.”
“The Fed has recently communicated some tolerance towards accepting inflation overshooting the 2% target, by indicating that the 2% target is symmetrical. We therefore think that it will take a lot before Fed diverges from the current course of one hike per quarter, why we expect four hikes in total this year. Our view is slightly on the hawkish side of the market pricing of somewhat more than three hikes in 2018.”
“While upwards pressure on headline inflation will be a global phenomenon over the coming 3-4 months, due to rising energy prices, the global core inflation trend is still mediocre. And there are still no convincing signs of any uptrend in Euro-area core inflation.”
“This leaves a scenario where the ECB will have to juggle higher headline inflation (potentially close to 2%) and weak core inflation over the summer. Ultimately there is no reason whatsoever to believe that the ECB will react to higher headline inflation, but there are risks that the markets will get carried away by headline inflation close to the ECB’s target.”
“With slowing growth momentum in the Euro area and a weak core inflation pressure, we still judge that the ECB is relatively far from the exit door, leaving a prolongation of the QE programme into 2019 as a very likely scenario. The market has recently “caught up” on our dovish ECB view, but there is still room for a slightly dovish repricing of the ECB.”
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