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US: Core CPI lower than expected, other data mixed

US: Core CPI lower than expected, other data mixed

The March CPI report alleviated some fears about inflation staying sticky in the face of slower growth. Headline CPI rose by 0.6% M/M and 2.8% Y/Y strongly, but in line with expectations. In February, headline inflation was up 2.4% Y/Y. Energy was the main culprit, up 5.9% M/M (4.4% Y/Y), while food prices rose a less threatening 0.3% M/M (3.3% Y/Y) following two months of steep, weather-related, increases. Core CPI surprised pleasantly, as it rose only 0.1% M/M (actually 0.061% M/M). On a yearly basis, core CPI slowed to 2.5% from 2.7% previously. Housing costs rose by a modest 0.2% M/M, clothing, very volatile, fell 1% M/M and medical care rose by an unusual low 0.1% M/M.

Housing starts rose slightly (0.8% M/M) to 1518K annual pace, up from a downwardly revised 1506K in February. Consensus was looking for a 1495K annual increase. Also permits were better than expected at 1544K (expected 1510K). The rise in starts was due to single-family starts, which is a positive, but narrowly restricted to the mid-west, one of the four regions. Mild weather might have been a factor. Looking through the monthly wiggles, Q1 starts averaged 1.475 million annual rate, down from 1.559 million in Q4 and the lowest since Q3 1997.

The industrial production fell 0.2% M/M following a downward revised 0.8% M/M increase in February. In both cases the weather played a decisive role. Cold weather in February pushed utility output sharply higher and milder March weather resulted in a payback (-7% M/M). However, if one excludes the volatile utility output, the report wasn??™t bad. Manufacturing output rose by a strong 0.7% M/M following a 0.1% M/M increase in February and a 0.6% M/m drop in January. On a yearly basis, manufacturing output rose by 2.4%, up from January??™s trough at 2%. While March was encouraging for the manufacturing sector, more sustained improvement is needed to become more optimistic.

EMU: ZEW suggests ongoing strength German economy

The German ZEW survey on economic sentiment rose in April for the fifth consecutive month, suggesting that the economy maintains its positive momentum. The headline index rose to 16.5 from 5.8 previously, easily beating expectations (10). The current condition index that softened a bit in recent months rose again in April to 69.2 to 76.9, a new record high. This indicates that the effects of the VAT increase have now been completely digested. The ZEW survey for the EMU area showed similar, albeit less pronounced results.

Other: BoE King writes a letter of explanation

UK inflation data surprised on the upside and pushed the annual rate up to 3.1% in March, from 2.8% in February. It is the first time inflation exceeded 3% since the BoE took charge of monetary policy, forcing the governor of the BoE to write the government a letter of explanation. Such a letter needs to be written when inflation deviates more than 1%-point from the 2% target. In that letter, the BoE pointed to the unexpectedly sharp rise in energy and food prices as one of the main reasons for the rise in inflation over the past year. However, the Bank also noted that firms have become more confident that they could raise prices to rebuild profit margins. The BoE is confident though that inflation will ease again in the coming months and is prepared to look through short-term volatility. FinMin Brown said he agreed with the Bank??™s approach and would continue to support the MPC in its forward-looking decisions. The recent pick-up in inflation and the increased pricing power of companies nevertheless suggests rates will need to go higher. This may already happen at the next meeting in May, when the new inflation report will be published. Markets however take already into account another 25bp rate hike beyond the expected May rate hike.