Markets surge on weak eurozone inflation data

• Eurozone inflation data tumbles, helping drive risk-on sentiment
• Hawkish RBNZ pause sees NZD push upwards
• US markets expected to rise as Fed’s Waller signals swift return to easing

European markets are surging upwards in early trade this morning, as early inflation data out of Spain and Germany helped bring forward expectations over a return to the 2% target. Ahead of tomorrows eurozone CPI release, the greater than expected slump in both core and headline inflation out of Spain brought increased confidence that we will see a similar pattern take shape tomorrow. Meanwhile, today sees regional German inflation data drip fed over the course of the day, with the North Rhine Westphalia (-0.3%), Baden Wuerttemberg (-0.3%), Bavaria (-0.4%), Brandenburg (-0.3%), and Hesse (-0.4%) contractions pointing towards a sharp pullback in German CPI this afternoon.

Last night saw the RBNZ leaves rates unchanged as expected, although a relatively hawkish stance from the bank helped drive NZDUSD into the highest level since 1 August. Coming at a time when everyone has been focusing on how disinflation could bring forward the timing of a rate cut, the RBNZ are worried that long-term 10-year inflation expectations are creeping upwards. With markets increasingly casting aside central bank warnings that rates will be higher for longer, the RBNZ insistence that banks need to heed that exact advice does further justify recent NZD strength.

US markets are expected to open on the front-foot, as the dovish optimism off the back of Waller’s comments were enhanced by growing expectations of a slump in eurozone inflation tomorrow. Fed member Waller stated that the current level of interest rates are well positioned for a push back down towards the inflation target. With inflation heading lower, Waller stated that we could see rates cut in three, four or five months. Markets currently price a first rate cut in May, and thus it appears as though the Fed are encouraging calls for a swifter return to easing than markets currently expect.