European stocks bear the brunt

[European stock market is more attractive than US market]

Global stock investors are finding that financial-heavy European markets are more profitable than U.S. markets, chock-full of highly valued technology stocks, amid growing signs that interest rates will remain high for longer. More attractive. European stocks saw the least outflows among major economies last week at $100 million, while the U.S. saw the largest outflows at $9.1 billion.

[French inflation rate unexpectedly picked up in February]

French inflation unexpectedly edged up in February, tying October's multi-decade high, driven by higher food and service prices. Preliminary data on Tuesday showed CPI rose 6.2% in February from a year earlier, slightly higher than January's 6.0%. Economists had expected inflation to hold steady at 6.0%. Meanwhile, food inflation accelerated to 14.5% from 13.3%, driven by higher transport prices, services inflation rebounded to 2.9% from 2.6%, while manufactured goods inflation edged up to 4.6% from 4.5% as winter sales ended. 

[ECB peak interest rate is expected to be close to 4%]

Euro zone government bond yields jumped to fresh highs in more than 10 years after French and Spanish inflation data, while expectations for peak ECB interest rates rose to nearly 4%. The European Central Bank's euro short-term rate (ESTR) for December 2023 rose to 3.875%, which means that by the end of the year, the deposit rate will rise to 3.975% from 3.775% last Thursday. The ESTR published by the ECB reflects banks' wholesale euro unsecured overnight borrowing costs. It is usually around 10 basis points lower than the deposit rate. "Inflation data is still leading the market," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors. “We are already forecasting a 50 basis point rate hike from the ECB in March, which would push the deposit rate to 3%, followed by a further 50 basis point hike by the end of the year, or even more likely 75 basis points, depending of course on the economy data. It makes sense to expect deposit rates to peak at 3.75-4 percent," he added.

[A peak of 3.85% reached in May]

The RBA had hoped that the decline in CPI inflation from 7.3% to 6.9% in November would continue, but in January it rebounded to 7.1% even though price pressures had eased in many other places. Since October, we have thought the cash rate would peak at 3.85% in May. The peak date is still thought to be in May 2023, but is now thought to be slightly higher.

[Japan's January industrial production fell the most in eight months]

Japan's industrial output fell by the most in eight months in January, as falling overseas demand hit key sectors including autos and semiconductor equipment hard. In contrast, separate data showed Japan's retail sales rose at the fastest rate in nearly two years in January, underscoring the divergence between weak manufacturing and robust services sector activity. “Weak export-oriented production and recovery in consumption remain the two focal points of the Japanese economy, and Atsushi Takeda, chief analyst at Itochu Research Institute, said the new leadership of the Bank of Japan will slowly adjust monetary policy due to uncertainty.