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"The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.". Lenin could have come up with the playbook for today’s political mismanagement and subsequent economic grind. 


Inflation Damnation 

French and Spanish inflation did for European stocks yesterday. French inflation jumped to 7.2% in the year to February, its highest rate since the euro was introduced and ahead of the 7.0% forecast. On a monthly basis, inflation accelerated to 0.9% from 0.4%. Core annual inflation in Spain rose to 7.7% from 7.5%, whilst the monthly figure shot up from a decline of 0.2% to +0.7%. It’s hotter and it’s reaccelerating, suggesting upside risks for inflation and markets began to price in the ECB hiking to 4%. The figures indicate inflation is going to prove stickier than the ECB would like – figures for the bloc are due on Thursday and expected to show a slowdown to 8.1% from 8.6% in Jan. It indicates that with 50bps a done deal for the March meeting, we could see another 50bps in May and then another couple of 25bps moves. Meanwhile UK grocery inflation hit’s not getting any better. German states inflation is coming out this morning – first up saw North Rhine-Westphalia reporting an annual increase of 8.5% in Feb, up from 8.3% in Jan.  


Better Data Emerged from China   

Although with the reopening of the country in the wake of draconian covid restrictions, it’s not a high bar to cross. Chinese manufacturing activity expanded at the fastest pace in more than a decade in February, with the PMI up to 52.6, jumping from 50.1 in Jan. The non-manufacturing PMI rose to 56.3 from 54.4. US ISM manufacturing PMI is due later – in Jan it contracted for a third consecutive month after 28 months of growth.  


A Mixed Bag for the US 

US data is not encouraging as consumers express fear about the future. The Expectations Index from the Conference Board, which is based on consumers’ short-term outlook for income, business, and labour market conditions—fell further to 69.7 from a downwardly revised 76.0 in January. Anything below 80 has been a good indicator of a recession in the past. 



Yet, a solid start for US equity markets has turned round a bit as bond yields rose again in anticipation of the Fed needing to go higher for longer. Stocks fell again on Tuesday to cap a soft February. For the month, the Dow Jones shed 4.2%, while the S&P 500 was down 2.6% and the Nasdaq fell 1.1%. The 10yr is knocking on 4%. Europe was better - the FTSE posted its best February since 2019, rising 1.3%. 


Europe Marches Higher 

European stock markets jumped into March with gains of around half a percent for the major indices in early trade on Wednesday – will it be in like a lion and out lime a lamb? That was Feb for sure in the US – we need to see at what point investors become comfortable with the higher for longer narrative and at what point they look through it to the sunlit uplands beyond...I think there is likely some further trouble before it turns.  



Cable – short term bounce off the 50-day line around 1.20, sits above the 200-day line with rising 100-day line offering support. Possible bullish crossover on the daily MACD is something to watch. Bank of England governor Bailey speaks later today.  


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