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LGT Navigator: Fed and ECB remain relaxed on inflation expectations

April 9, 2021

The Federal Reserve has the tools to contain any inflationary pressures that might arise as the economy recovers from the corona crisis, said Fed Chairman Powell yesterday and thus calmed growing concerns about a sharp and rapid rise in inflation. The ECB also expects inflationary pressure to be only temporarily stronger. The two most important central banks are thus signaling that a change of course is not to be expected at present. These “assurances” are likely to go down well on stock markets.

Fed and ECB remain relaxed on inflation expectations

The prospect of a continued loose monetary policy by the Federal Reserve (Fed) and the European Central Bank (ECB) kept the New York Stock Exchange on course on Thursday and supported the cyclically sensitive technology stocks. The Nasdaq Composite and Nasdaq 100 each gained about 1%. The broad-based S&P 500 reached another record high during the day and closed +0.42% higher at 4'097.17 points. The Dow Jones Industrial recorded a moderate daily gain of +0.17% and went out of trading at 33'503.57 points near the recent record levels. The continuing loose monetary policy, the prospect of the massive infrastructure program of the US government and the hope for a rapid revival of the economy and a containment of the pandemic through progressive vaccinations continue to have a positive effect. That the road remains rocky was shown by the data published yesterday on the short-term development of the US labor market. The number of initial claims for unemployment benefits rose to 744'000 last week, while analysts on average had expected a decline to 680'000.

Asian stock markets were mixed on Friday, as China's stock markets suffered from inflation concerns after Chinese producer prices rose +4.4% in March from a year earlier. This could lead to faster tapering by China's central bank. 

Increased inflation expectations mainly temporary, according to ECB

ECB President Christine Lagarde expressed the view that the increase in inflation observed at the beginning of the year is based on special factors and is mainly temporary and statistical in nature. Although a slight increase in underlying inflation is to be expected in the short-term, this is due to the current supply-side constraints and the recovery of domestic demand, she said. However, low wage pressures and the temporary strong appreciation of the euro are likely to ensure that overall price pressures will remain weak. In its current forecasts, the ECB expects inflation in the euro area to be +1.5% in the current year, but then to decline to +1.2% in 2022. In 2023, the central bank expects an inflation rate of +1.4%.

ECB Chief Economist Philip Lane also stressed that although the ECB expects increased inflationary pressure in the coming months, this will only be temporary. This temporary inflationary pressure, he said, was due to a variety of temporary factors, such as temporary VAT adjustments or fluctuations in the oil price, none of which are likely to have any impact on medium-term inflation dynamics. Even in the longer term, inflation in the euro zone is likely to remain well below the central bank's medium-term target of just under two percent, Lane was quoted in the “Handelsblatt.”

Producer prices in the eurozone, however, confirm short-term increase of inflationary pressure

In the euro countries, prices at the producer level rose sharply in February. On an annual basis, producer prices increased by +1.5%, registering the highest inflation rate since May 2019. On a month-over-month basis, producer prices rose 0.5% in February. Higher producer prices usually pass through to consumer prices with a time lag.


Economic Indicators Arpil 9

MEZ Country Indicator Last
07:45 SZ Unemployment Rate (February) 3.6%
08:00 GE Exports (February, m/m) +1.4%
08:00 GE Imports (February, m/m) -4.7%
08:00 GE Industrial Production (February, m/m) -2.5%
14:30 US Producer Prices (March, m/m) +0.5%
14:30 US Producer Prices (March, y/y) +2.8%
14:30 US Core Producer Prices (March, y/y) +2.5%

Earnings Calender April 9

Country Corporate Period
SZ Ems Chemie Q1 Sales


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