Eurozone inflation on the rise, as eyes turn to Canadian GDP and US PCE readings

• Eurozone inflation spark euro rebound
• Trump court case and PCE inflation data key for US session
• Canadian growth sets the ground ahead of BoC meeting next week

A mixed start in Europe has seen mainland indices lag their UK counterpart, with an unexpectedly strong eurozone inflation report dampening hopes for a dovish assessment from the ECB next week. With both headline (2.6%) and core (2.9%) inflation on the rise, the justification for three rate cuts this year will likely come under pressure as we await Lagarde’s assessment on Thursday. Services inflation remains central to this current resurgence, with annual services CPI currently standing at 4.1%. Meanwhile, the difficulty of the ECB’s job defining policy for all member nations has been highlighted by the wide breadth of inflation rates in place, with the concerning one-month surge in Portuguese CPI (1.1%) bringing its annual rate to 3.9% (just above the Spanish rate of 3.8%). From a market perspective, the euro has found itself back in favour, with the diminishing hopes of three 2024 cuts bringing a reversal of the weakness seen for much of this week.

Yesterday’s guilty verdict from the New York court presiding over Trump’s hush money case does provide a greater degree of uncertainty around a Presidential race that had him as the firm favourite to retake the White House. However, his ability to gloss over past issues does stand him in good stead to weather this storm, as highlighted by the fact that he is even in this position given the storming of the White House at the end of his tenure.

Today will see a big focus on the Fed’s favoured core PCE inflation metric, with markets likely to take on a somewhat subdued tone until we get greater clarity on this key data point. Currently standing at 2.8%, there is a hope that the core PCE price index will drop back down to 2.7%. While the steady pathway of disinflation has taken this metric down from 4.8% to 2.8% in the space of a year, there are still considerable questions over what it would take for the Fed to start cutting interest rates.

Traders will be keeping a close eye out for the latest growth data from Canada, with markets expecting a sharp surge in GDP that raise questions over the justification of a rate cut from the Bank of Canada next week. The BoC’s 1-3% inflation target does provide a more forgiving environment to operate within, and markets are therefore pricing in a 65% chance that the bank eases on Wednesday. However, with first quarter GDP expected to jump to 0.6%, there could be some questions over whether the Bank may opt to hold off in the event of an economic rebound.