EUROPEAN INFLATION: Lower Services Inflation Pressures In February
Eurozone services prices rose 0.61% M/M, notably less than the 0.85 / 0.87% rises seen in February '23/24 but more the average seen in between 2010-2019 of 0.50%. Excluding the volatile package holidays and airfares subcomponents, we estimate services inflation at 3.69% Y/Y (vs 3.90% prior). As such, services inflation pressures appear to have seen a material dip in February, and a continuation of that in the March inflation round would certainly be held up in favour of an April cut by the more dovish cohort of the ECB governing council.
- Looking at developments in the individual services categories:
- Transport services with a material 1.2pp slowdown to 2.75% Y/Y (vs 3.96% Jan, 4.25% Dec), driven by airfares at 1.52% Y/Y vs 4.86% Jan).
- Recreation and culture at 2.34% Y/Y following January's 2.80%; regardless, that is no material drop from Y/Y rates seen last year here after the yearly rate trended broadly sideways in H2'24
- Restaurants and services also slowed down, to 3.95% Y/Y - its lowest rate since January 2022 and around 0.2pp below January's 4.17% pace.
- Health barely changed at 3.38% Y/Y (vs 3.43% Jan), while communications slightly slowed to -3.19% Y/Y (vs -3.07% Jan).
- On a seasonally adjusted basis using ECB data, Eurozone services inflation rose 0.27% M/M in February, a 6bp downward revision from the flash release. Services inflation momentum was 3.05% 3m/3m, above December's 2.54% on the back of a base effect (soft November data). While that means the projected momentum acceleration flagged by some analysts after the November data did materialize in February, last month's inflation round overall points towards the services pace tapering off a little. However, the pace remains above pre-pandemic norms, and appears still a bit too high to be consistent with the ECB's 2% target taking into account current goods inflation.
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Historical bullets
ECB: Weekly ECB Speak Wrap (Feb 10 – Feb 17)
In the following publication, we provide a summary of ECB-speak between February 10 and February 17: 250217 - Weekly ECB Speak Wrap.pdf
The ECB’s March decision is just over 2 weeks away, and policymakers have not shown any appetite to push back on market pricing for another 25bp cut. The March decision will include a new set of macroeconomic projections, while any tweaks to the policy statement guidance following the recent report on neutral rates will also be in focus.
- On the topic of neutral, Vujcic joined Governing Council colleagues in playing down its role in calibrating near-term policy. Meanwhile Nagel provided a slightly more nuanced view, noting that neutral “indicates when we need to be more cautious with policy-rate moves so that we don’t take a wrong step”.
- Holzmann pushed back on the idea of 50bp rate cuts, though this probably already aligns with the median Governing Council view.
- Bank of Italy Governor Panetta spoke for the first time since November, striking a characteristically dovish tone. He warned that “a less decisive easing of monetary policy could lead to excessively low inflation in the medium term”.
- ECB-dated OIS price 77bps of easing through year-end, around 12bps more hawkish than a week ago. EUR STIR implied yields were dragged higher by the long-end at the start of the week, while reduced near-term growth risks on the back of vague US reciprocal tariff plans drove hawkish repricing into Friday’s close.
- The week ahead is headlined by the February flash PMIs on Friday, while ECB Executive Board Member Cipollone will speak on the ECB’s balance sheet at an MNI Event on Tuesday (sign up here). See here for a recent note on the impact of declining Eurozone excess liquidity.
ESM ISSUANCE: 10-year Feb-35 syndication: Priced
- Reoffer: 99.063 to yield 2.859%
- Size: E2bln WNG
- Books closed in excess of E8.5bln (ex JLM interest)
- Spread set earlier at MS+42bps (guidance was MS+45 area)
- HR 98% vs 2.50% Feb-35 Bund (ref 100.16 + 37.8bps)
- Maturity: 26 February 2035
- Coupon: 2.75%, Long first
- Settlement: 24 February, 2025 (T+5)
- ISIN: EU000A1Z99W5
- Bookrunners: BofA (DM/B&D), DB, Santander
- Timing: TOE 12:22GMT / 13:22CET. FTT immediately.
From market source
JPY: Fading USD/JPY Adds to Bullish JPY Impetus
USD/JPY fade picking here slightly into (what would be) the US open - USD/JPY edges to a new pullback low at 151.42, marking a break through 151.65 and the overnight lows. Weakness here looks contained until any test or break through more notable support at 150.93 - the YTD low posted just over a week ago.
- Perhaps unsurprisingly volumes are lighter than average so far Monday with the US holidays, however activity is holding up pretty well: CME JPY futures show activity running ~15% below what you'd expect to see at this point in the session.
- As mentioned above, conviction over shorting EUR/JPY is building among the sell-side, and coincides with the failure of the cross to break technical resistance at the 50-day EMA in recent sessions - and should USD/JPY take out the bear trigger at 150.93, that makes two notable technical indicators pointing to JPY strength.
