11 March 2021
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US core inflation eased in February

Core inflation pressures in the US eased in February, taking some of the wind out of the sails of the reflation trade.

By Edward Bell

  • Core inflation pressures in the US eased in February, taking some of the wind out of the sails of the reflation trade. The core CPI index rose just 0.1% m/m after two months of no change and increased by 1.3% y/y, a slight slowdown from January. Headline inflation ticked up by 0.4% m/m (1.7% y/y), an acceleration from January’s level. Over the next few months measures of inflation in the US are likely to push higher given base effects when comparing with Q2 2020 when the economy endured the brunt of the Covid-19 pandemic.
  • The American Rescue Plan has passed the US House of Representatives and will now be sent to President Joe Biden for his signature and implementation. Additional cash payments of USD 1,400 could begin to be sent out nearly immediately along with extending additional unemployment benefits until September.
  • The Bank of Canada held rates steady at 0.25% overnight and kept its asset purchase programme unchanged. Governor Tiff Macklem said after the decision that the BoC would not raise rates until the “damage” from the pandemic was repaired and that the labour market in Canada was a “long way from recovery.” Canada’s economy has managed to hold up reasonably well in renewed rounds of lockdowns and is likely to benefit from an accelerating US economy. Among the major central banks, the BoC may be among the first to pull back on high levels of asset purchases at some point this year.
  • The UAE will host Israel’s Prime Minister Benjamin Netanyahu for the first time today according to local media. Since official relations began last year, direct flights linking the countries have begun and a quarantine-free travel corridor is under consideration for vaccinated passengers.
  • In Egypt, inflation rose in February to 4.5% y/y from 4.3% y/y a month earlier, and 0.2% m/m compared to a -0.4% m/m slowdown in January. While inflation remains relatively sedate compared to the highs seen in recent years, and is still well within the central bank’s target of 7% +/- 2pp at Q4 next year, the likelihood is that the CBE will remain on hold at its upcoming March 18 MPC meeting. The domestic circumstances probably allow for the rate cut we had anticipated but the volatility seen with rising US yields and fears over a repeat of the taper tantrum of 2013 will forestall any action by the bank.

Today’s Economic Data and Events

11:00 TU Current account balance (Jan): forecast USD -1.55bn

15:00 SA Manufacturing prod y/y (Jan): forecast -1.1%

16:45 EC Deposit facility rate: forecast -0.5%

17:30 US Initial jobless claims: forecast 725k

Fixed income

  • Bond markets responded positively to the modest inflation print from the US as fears of an imminent surge in prices appeared to ease. Yields pulled back from intraday highs and closed lower across regions and terms. In the UST market, 2yr UST yields closed at 0.1528% after nearly reaching 0.17% intraday while 10yr yields closed at 1.518% after having peaked at over 1.56 during the session.
  • Emerging market bonds were mixed overnight but at least a momentary easing of international pressures will be welcome. Yields were lower in both South African and Turkish 10yr LCCY bonds while in India, 10yr yield bumped up by almost 4bps to 6.247%.


  • The dollar eased again overnight with the DXY index falling 0.15% to 91.823. Moderate inflation even as the US economy is to benefit from expansive stimulus seemed to weigh on the dollar in the short-term.
  • Gains were broad based with EURUSD up 0.2% at 1.1929 while GBPUSD was up 0.3% at 1.3932. The Euro will be in prime focus today with the ECB’s decision and whether they will comment directly on the rise in bond yields.
  • Commodity currencies also saw decent gains with the AUD up 0.3%, the CAD strengthening after the BoC’s decision to hold still and the NZD adding 0.4%.


  • Equity markets had a relatively strong day yesterday, and while the NASDAQ did see some losses, at -0.04% the index closed almost flat, and has held on to its 1.4% ytd gains. Meanwhile the stock rotation trend appeared to remain in play as the blue chip Dow Jones, which was arguably the laggard of the major US indices last year, saw gains of 1.5% to hit a new record high. The S&P 500 closed up 0.6%.
  • In Europe, the FTSE 100 closed flat with losses of less than one basis point, but on the continent the CAC and the DAX both closed higher, gaining 0.7% and 1.1% respectively.
  • Within the region the DFM gained 0.3% and the Tadawul 1.3%.


  • Oil prices were higher overnight even as the US reported another enormous build in crude stocks. Brent futures added 0.6% to close at USD 67.90/b while WTI was up 0.7% at USD 64.44/b. Total crude stocks in the US rose almost 14m bbl last week as output continues to recover from freezing weather earlier in February. However, the build in crude was offset by a large draw in gasoline (down nearly 12m bbl), a healthy sign of oil demand. Total production in the US was up by 900k b/d last week to 10.9m b/d, essentially recovering all lost output in the past few weeks.

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Written By

Edward Bell Head of Market Economics

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