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Weekly Economic & Financial Commentary: European Economic Trends Remain Unsettled For Now

U.S. Review

Inflation Begins Spring Bloom

  • Inflation appears to be heating up. During February, the Consumer Price Index (CPI) rose 0.4% and the Producer Price Index (PPI) advanced 0.5%. The NFIB Small Business Optimism Index edged up to 95.8 in February, reflecting growing optimism on vaccinations and lighter COVID-related business restrictions.
  • Jobless claims dipped to 712K during the week ending March 6. Jobs openings (JOLTS) during January jumped to 6.9 million, the most since pre-pandemic. Consumer sentiment (University of Michigan, preliminary) spiked to 83 amid falling COVID cases and news of more fiscal stimulus on the way.

Global Review

European Economic Trends Remain Unsettled For Now

  • The Eurozone economy entered 2021 on an unsettled note. Comprehensive Q4 GDP figures showed a 0.7% quarter-over-quarter decline and, within the details, and large fall in consumer spending and overall final domestic demand. With economic trends uncertain, the European Central Bank leaned against rising yields, saying it would significantly increase the pace of its bond purchases in the months ahead. The effect of renewed restrictions in the U.K. was evident in January GDP figures, which showed a fall of 2.9% month-over-month.
  • Next week’s data, from outside of Europe, might be more upbeat. Among the releases, China is expected to report sizable gains in retail sales and industrial output for early 2021, while Australia is expected to report another rise in employment for February.

U.S. Review

Inflation Begins Spring Bloom

The weather is not the only thing beginning to warm up. The Consumer Price Index (CPI) rose 0.4% during February, the strongest monthly increase since last August. The headline index is now up 1.7% over the past year. While inflation still remains generally subdued, price pressures are starting to firm. Much of February’s increase was owed to a 3.9% rise in energy prices, however food prices also edged up during the month. Core inflation picked-up slightly compared to the flat readings of the past several months, but still rose 0.1% during the month.

Despite remaining fairly benign at present, inflation appears headed for a spring bloom. Over the next few months, the yearly comparisons will likely be overstated by easy base comparisons (prices dipped during the lockdown period last spring), but more fundamental factors are likely to add to price pressures. For one, services inflation is poised to be reawakened alongside unleashed consumer demand for the high-contact services which have been limited by COVID safety protocols for much of the past year.

Furthermore, commodity prices are climbing and factory-gate inflation is starting to build. The Producer Price Index (PPI), which tracks average selling prices received by producers, rose 0.5% during February. The PPI is now up 2.8% over the year. The PPI excludes sales taxes, retail mark-ups and transporting costs, so it is not a reliable predictor of consumer price changes. What’s more, businesses appear to be positioning themselves to pass on higher costs. The NFIB Small Business Optimism survey showed a net 34% of businesses planning to raise prices in the next three months, the largest share in more than 12 years.

Despite the recent margin-crimping rise in operating costs, overall small business optimism appears to be creeping higher. During February, the NFIB’s Small Business Optimism Index climbed 0.8 points to 95.8. The harsh winter weather experienced by much of the central U.S. probably weighed on sentiment, but businesses are becoming more optimistic. The proportion of small business owners expecting the ec