ECB in focus as markets continue to struggle on CPI concerns

• European markets struggle as the US inflation concerns continue to weigh on sentiment
• Chinese inflation slumps, highlighting ongoing growth fears
• Bulls hope the ECB can turn the tide after recent market declines

European markets struggling for direction in early trade as investors way up a myriad of opposing factors that come into play today. Yesterday’s inflation gauge from the US further cast doubt on the likeliness of a June rate cut from the Federal Reserve, with concerns over an expected rise in inflation only worsened by a higher-than-expected reading. Looking further out the likely struggles faced by the US in driving inflation back down to target could bring a more protracted decline in rates even once the first pivot has been initiated. This provides the basis for potential further outperformance for the greenback, with the dollar index rising to the highest level in almost five months this morning.

Chinese inflation data served to further highlight the ongoing troubles at the world’s second largest economy, with CPI falling back down to 0.1% after last month’s surprisingly strong 0.7% reading. Unfortunately, the 1% monthly decline represents a reversal of the 1% gain seen in February with the lunar new year boost proving temporary. Economic activity in the region continues to flounder and the government’s willingness to pop the economy appears questionable this time around. Nonetheless, while this period of deleveraging may come to the detriment of economic growth and activity, it should ultimately provide the basis for a more stable economy going forward.

Equity bulls will hope that the ECB can turn the tide on market sentiment today, with Christine Lagarde expected to take on a notably more dovish tone that could set us up for a rate cut in June. Eurozone rates are significantly lower than many of their global counterparts, but that looks unlikely to stifle any calls to further wide gap between US and eurozone rates. The relative importance of the beleaguered manufacturing sector has been one of the major hurdles faced by the eurozone, and investors will be keenly watching for signs that the ECB will finally shift their focus from inflation to growth.