Inflation in the 18-member euro zone unexpectedly slowed to 0.7
percent year-on-year in January, matching a four-year low set last
October and confounding expectations for a rise to 0.9 percent.
The ECB cut its main refinancing rate to a record low of 0.25
percent in November and left it at that level at its meeting earlier
this month, but put markets on alert for a possible move in March.
ECB President Mario Draghi said the Governing Council had not acted
because of the complexity of the situation and the need to have more
The next meeting on March 6 will have new forecasts from the bank's
staff extending into 2016.
Friday's February inflation figure could cause a fine-tuning of
those forecasts, which form the basis of the ECB's monetary policy.
"The big issue is whether they are comfortable with their
medium-term trajectory. That's obviously something that's going to
get revised down a bit ... Next week's reading will in some sense
influence their thinking," said David Mackie, chief European
economist at JP Morgan.
Further country data could mean the January figure being revised up
to 0.8 percent on Monday, but the consensus view is for a 0.7
percent reading for February.
Commerzbank, which predicted the 0.7 percent figure in January, sees
a further drop to 0.6 percent for February. Christoph Weil,
economist at the bank, said this would prompt the ECB to reduce its
2014 and 2015 inflation forecasts each by 0.2 percentage points from
already low levels of 1.1 and 1.3 percent respectively.
"It's a close call, but we see the ECB cutting interest rates," Weil
said, adding Commerzbank's view is that the main repo rate would
drop to a fresh low of 0.1 percent.
The market consensus is for no further cut.
Inflation data will arrive at the same time as unemployment figures.
The typically lagging indicator is expected to show no improvement
in January from the 12.0 percent rate of December.
Across the Atlantic, the debate rages on about whether the U.S.
economy's apparent weakness at the start of this year is purely a
temporary blip caused by an exceptionally cold winter or something
Federal Reserve Chair Janet Yellen will testify before the Senate
Banking Committee on Thursday, some two weeks after she told the
House Financial Service Committee that the central bank would keep
on reducing its stimulus.
Lawmakers may ask whether she has a different view on the weather
question, although few expect an abrupt change.
After a week featuring a promising survey of U.S. manufacturers, but
a decline of housing starts, factory activity and home sales, there
will be more data on home prices and sales, consumer confidence and
durable goods orders.
For Nomura's chief U.S. economist Lewis Alexander, the latter, due
on Thursday, is particularly important given that higher fixed
investment by businesses underpins many economists' outlook of a
better rest of the year.
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Alexander said some weakness in the first quarter had been expected,
even without the harsh weather, because of a strong second half of
2013 supported by inventory accumulation.
The jury would be out until a spring thaw on whether the weakness
went beyond the weather and the inventories issue.
"If you look at the breadth of the weakness we've seen in the last
six weeks or so, in things like the retail sales report and the
weakness on payrolls, I think it certainly is consistent with the
notion that there's something bigger going on than just those two
temporary factors," he said.
The weather of course will influence the durable goods data, such as
in terms of capital goods for the construction sector.
In China meanwhile, the economy really is weakening.
Activity in China's factories shrank again in February, a survey
showed, the minor slowdown in the world's second-largest economy
enough to upset markets across the region.
The flash Markit/HSBC Purchasing Managers' Index (PMI), released
last week, dropped to a seven-month low of 48.3 in February, the
second month at a level below 50, indicating contraction.
Official PMI from the National Bureau of Statistics, with a bigger
sample size, will provide a further guide on Saturday and could add
to the view of some economists, still in the minority, who believe
China will need to ease policy to support growth of 7.5 percent.
In Japan, data due on Thursday are expected to show factory activity
accelerated in January, after disappointing fourth-quarter growth
figures cast doubt on the effectiveness of the aggressive stimulus
of Prime Minister Shinzo Abe's year-old government.
Thursday is also likely to see Japan's core inflation hovering at
five-year highs above 1 percent, but still well below the Bank of
Japan's (BoJ) 2 percent goal.
A Reuters poll last week showed the BoJ is expected to ease monetary
policy further by the summer to help boost the economy as the
effects of the government's stimulus begins to wane.
(Additional reporting by Jason Lange in
Washington, Gui Qing Koh in Beijing and Tetsushi Kajimoto in Tokyo;
editing by David Holmes)
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