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The ECB will meet in a couple of weeks amongst growing doubt it will deliver on as much tightening as officials claim. The inflation figures coming out over the next couple of days will be pivotal for that decision, driving markets. The Euro is also at something of an inflection point as global recession worries mount.

At the moment, there seems to be something of a consensus that the ECB will hike by a quarter of a point at the next meeting. That is what ECB President Lagarde seems to be insisting on with her comments about inflation being “too high for too long”. It’s a phrase used by the hawkish side of the board, including Germany and The Netherlands. But there have been numerous dissenting voices of late, such as from Italy and Portugal.
 

Core over headline

The narrative competing with Lagarde is “we’ve gone most of the way” with regard to hikes. Members who espouse that line typically also say the ECB is too focused on core inflation. The headline rate is still higher than the core rate, thanks to higher energy and food costs in Europe. A good portion of that is due to factors beyond the control of monetary policy, such as the war in Ukraine and poor weather in Spain and Italy that has hurt crops.

The thing is, headline inflation is coming down faster than core, and is expected to keep falling while the core measure descends slowly. Meaning that not focusing so much on core (that is, moving away from the traditional way central banks look at inflation) means that the ECB can get away with not hiking as much.
 

What do the numbers say?

Tomorrow, Germany and France provide preliminary CPI measures, which generally set the tone for the market reaction. That’s because the final CPI figures for the whole of the Eurozone are typically in line with what the two largest countries report. Of course, if there is a substantial deviation when the entire shared economy’s figure is reported, then there can be another market reaction.

First to report is France, where inflation is expected to come down to 5.7% compared to the 5.9% reported previously. France will also report its final Q1 GDP figure, and there could be some expectations around this release. That’s because Germany’s final revision was lower than expected, pushing the country into a technical recession. France’s Q4 GDP was flat, meaning that even if Q1 is revised lower to negative, it wouldn’t mean a recession – technically. But if the two largest countries are reporting negative growth, it could impact risk sentiment.
 

The bigger movers

Germany's May Preliminary CPI is next and is expected to decrease to 6.7% from 7.2% prior, with the monthly rate remaining steady at 0.4%.

On Thursday, the Eurozone reports its headline CPI, expected to decelerate to 6.5% from 7.0% prior. Still way above target, but moving strongly in the right direction would allow for debate on slowing down the rate of hiking. Eurozone core inflation is expected to have a much more modest deceleration to 5.4% from 5.6%, holding to the “sticky” narrative that worries some policymakers.

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