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Marketmind: Markets brace for inflation trifecta

Customers shop in a hypermarket in Paris

A look at the day ahead in European and global markets from Wayne Cole

It's all about inflation this week with markets pricing in upside risk for the core U.S. reading, and a downside chance for European and Japanese consumer prices.

The Federal Reserve's favoured core measure of personal consumption expenditures (PCE) prices is forecast to rise 0.4%, with a risk of 0.5% m/m, when it wasn't that long ago markets had been hoping for a nice tame 0.2% increase.

Some of this is the "January effect" which sees prices for many goods and services rise at the start of the year, notably for healthcare. The bull run on Wall Street will also play a part by pushing up the cost of portfolio management.

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Indeed, the core services ex-housing PCE measure, which Fed members like to reference, could well rise 0.6% m/m for the biggest gain since December 2021.

The six-month annualised pace could thus climb to around 2.5%, after two months of running just below 2%, which is a major reason the market has pushed out the expected timing of the first Fed rate cut to June from May.

There are at least 10 Fed speakers out this week, including the influential New York Fed chief John Williams, while Chair Powell gives his Senate testimony on March 7.

The headline CPI for the European Union on Friday is seen slowing to 2.5% from 2.8%, with the core at 2.9% versus 3.3%. That will almost certainly lead the ECB to lower its inflation forecasts at its March meeting, although the market sees almost no chance of a rate cut then. Futures probability is around one-in-three for an April easing, and almost fully priced for June.

Inflation reports from Germany, France and Spain out on Thursday will serve as an appetiser for the main feast.

Japan's CPI is out on Tuesday and is forecast to slow to an annual 1.8%, from 2.3% in December, although the core core measure is seen at 3.3% and still above the Bank of Japan's 2% target.

Such a slowdown in inflation would seem to argue against a policy tightening, yet BOJ officials have been putting more weight on rising wages, leading markets to wager it will lift rates to zero in March or April from the current -0.1%.

The Treasury market also faces a tough week of new supply with $127 billion of two- and five-year notes due later on Monday, and another $42 billion in seven-year paper due on Tuesday. [US/]

And there is a non-trivial risk some U.S. government agencies could be shut down if Congress cannot agree on a borrowing extension by Friday.

Friday brings the release of the February China PMI, where analysts are tipping a slight improvement to 49.5, while the U.S. ISM survey of manufacturing is also forecast to rise to 49.5.

Key developments that could influence markets on Monday:

- UK CBI Distributive Trades for Feb

- Bank of England Deputy Governor Sarah Breeden and chief economist Huw Pill speak

- Participation by ECB president Christine Lagarde in plenary debate on the ECB Annual Report

- Fed Bank of Kansas City President Jeffrey Schmid speaks on the economic and monetary policy outlook

(By Wayne Cole; Editing by Edmund Klamann)