Happy Wednesday everyone, and welcome back yet again to our weekly ‘5 Things We Watch’, where we take you through 5 of the topics that we follow in global macro this week. 

We are in the middle of a hectic week for markets (as usual), with German Ifo numbers signaling a slowing economy in Germany, whilst EU CPI data tomorrow will paint European markets and give us a hint about what the ECB will do next. In the US it’s fair to say that this week is all about the labor market, which is THE thing to watch in order to understand what the Fed will do next as the tight labor market is one of the main areas of interest for Powell. The first signs of a cooling labor market have kicked in, but we still haven’t entered recession territory. But without further ado, let’s dig straight into the topics covered in this week

This week we are watching out for the following 5 topics within global macro: 

1. EU Inflation
2. US Labor Market
3. European Money Growth
4. UK Stagflation (Article coming soon)
5. IFO (Article coming soon)

1) EU Inflation

Tomorrow’s inflation print will be all about energy and food, which have been some of the main contributors to the inflationary cycle so far. The headline inflation outpaced core inflation again in Spain and Germany and even if core inflation looked relatively soft at 0.26% MoM in Germany, it may be overshadowed by the energy effects once again.

The report contains the spike in LNG/Electricity prices due to the Australian strike risks and after all we ought to remember that the ECB has a headline inflation mandate. Energy remains a dark horse in the disinflation bet in Europe.

Having said that, if we look at inflation developments across the globe, we find the momentum in Europe worth noting. 3m annualized core prints at 1.81% (and will probably run around 2% after tomorrow’s inflation release), which is well below the momentum in the US. This is partially driven by seasonal patterns, but underlying price surveys also suggest that services pricing is fading hard in Germany, France and the UK for example due to less tight labour markets than in the US.

The ECB may hike a final time, but we find a cutting cycle in Europe much more likely than a ditto in the US into 2024 (Rates Watch: Anything weak enough to receive?)

Chart 1: Core inflation heatmap across major economies