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Europe: The Week Ahead (Apr 15-19), Austrian Inflation Slows Despite ECB’s Dovish Tack

Austria is set to release a fresh gauge of its rate of inflation in the week ahead, as market participants continue to grapple with slowing consumer prices across the European continent.

Among the economic data scheduled to be unveiled, investors Wednesday, April 17, will receive updated figures from Austria’s consumer price index (CPI) for March, as well as further color on the broader euro area’s inflation picture.

Austria’s inflation rate has been decelerating since November 2018, with the latest reading in February 2019 having risen only 1.5% from a revised increase of 1.8% in the prior month, according to Statistics Austria.

The decline was mainly attributed to cheaper garments and flight tickets, while the most important drivers included home goods, water and energy, followed by restaurants and hotels.

Meanwhile, the level of the harmonized index of consumer prices (HICP 2015) was 105.61 in February 2019 from a revised January figure of 105.62, with the harmonized inflation rate amounting to a gain of 1.4%.

ECB’s ongoing efforts to combat stubbornly low levels of euro area inflation

The euro area continues to contend with stubbornly low levels of inflation, with the latest flash reading of CPI for March at a rate of 1.4%, down from 1.5% in the prior month, according to Eurostat. While increases in energy costs primarily buoyed consumer prices, a decline in costs for food, services and non-energy industrial goods appeared to apply downward pressure.

In his press conference Wednesday, European Central Bank president Mario Draghi noted that headline inflation is likely to decline over the coming months given the current prices of oil futures.

He said that measures of underlying inflation “remain generally muted,” but is expected to increase over the medium term, “supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.”

To spur inflation close to its 2% target over the medium term, the ECB elected Wednesday to maintain its key interest rates on its main refinancing operations, as well as on its marginal lending and deposit facilities at 0.00%, 0.25% and -0.40%, respectively, where they will most likely remain through the end of 2019.

Also, among other easing measures, the ECB at its previous meeting in March said it will reintroduce its quarterly targeted longer-term refinancing operations (through a new TLTRO-III series), which will be launched in September 2019 and end in March 2021.

However, Draghi did not discuss details on “the precise terms” of the new series of TLTROs, including pricing of the TLTRO-III operations, saying instead that they will be communicated at a future meeting.

He added that the ECB’s Governing Council will also consider whether the implications of negative interest rates for the economy will require “the mitigation of their possible side effects, if any, on bank intermediation.”

Against this backdrop, The iShares MSCI Austria ETF (NYSEARCA: EWO), which contains among its top holdings financial sector firms Erste Group Bank (OTCMKTS: EBKDY) and Raiffeisen, appears to have been moving sideways since the start of 2019, amid slowing global growth.

The ETF has gained roughly 18% since its latest 52-week low set December 24, 2018, according to the IBKR Trader Workstation. EWO had fallen by more than 32% from its most recent 52-week peak in April 2018 and has gained around 12.8% year-to-date in 2019.

Trade implications

Global headwinds, namely Brexit uncertainties, as well weaker exports on the back of trade-related effects, have generally stymied growth in the euro area, which had seen acceleration at its fastest pace a year ago. The potential for further U.S.-imposed tariffs on imported European goods will likely also throw a wrench into the ECB’s ongoing efforts to provide economic stimulus, which could shift the continent’s attention more towards China and Russia.

Marc Chandler, chief market strategist at Bannockburn Global Forex, noted that U.S. President Donald Trump’s recent threat of levies on US$11 billion of EU goods for damage that the WTO has recognized in unfair subsidies to Airbus “succeeded in breaking a log-jam at the EU-China summit,” and early “indications suggested differences would prevent a statement” at its conclusion.

Chandler continued that “within 12-hours of Trump’s threat, a joint statement was issued, and a trade and investment agreement optimistically could be reached by the end of the year,” while evidence suggests that the “estrangement of Europe and the U.S. is very much in China (and Russia’s) interest.”

He added that U.S. “protectionism and demand that its allies not only pay the cost of U.S. bases but also a 50% tribute on top of it pushes Europe away as much as China’s initiatives pull Europe toward it.”

Investors will likely be watching the trajectory of Austrian and euro area CPI, amid the recent geopolitical volatility and as growth across the broader euro area continues to stall.

Economic releases in Austria and the euro area in the week ahead include:

Tuesday, April 16

  • Euro Area Construction (Feb)
  • Euro Area ZEW Economic Sentiment (Apr)

Wednesday, April 17

  • Austria Harmonized Inflation Rate (Mar)
  • Austria CPI (Mar)
  • Euro Area CPI (Mar)
  • Euro Area Trade Balance (Feb)

Thursday, April 18

  • Euro Area Markit Manufacturing PMI - Flash (Apr)
  • Euro Area Markit Services PMI - Flash (Apr)

Note: This material was originally published on IBKR Traders' Insight on April 10, 2019.

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