London Daily

Focus on the big picture.
Wednesday, Oct 04, 2023

Why an easing of inflation in the eurozone is not being cheered by financial markets

Why an easing of inflation in the eurozone is not being cheered by financial markets

While it is good news the eurozone is seeing a decline in inflation, it is important not to get carried away. Further interest rate hikes from the European Central Bank are certain.

October is traditionally an awful month for stock market investors.

And yet, for the first time since the summer of 2021, global equities look set to complete back to back monthly gains for October and November.

The STOXX 600, the most widely-followed pan-European stock index, is up some 13% since the beginning of October while the S&P 500, the broadest US stock index, is up by just over 10% in the same period.

This optimism largely reflects hopes that central banks around the world, led by the US Federal Reserve, will "pivot" and slow the pace at which they have been raising interest rates.

That thesis, of course, relies on an easing in inflation.

There was good news on that front earlier this month, when the headline rate of inflation for October came in at a lower than expected annual rate of 7.7%, making it the first month since February that the figure had come in below 8%.

And on Wednesday morning, encouragingly, the eurozone got in on the act.

The headline rate of inflation in the 19 countries using the euro fell for the first time in 17 months in November, falling from the record 10.6% seen in October to 10%, way below the 10.4% that had been expected by economists

The key factor was an easing in the pace at which energy costs are increasing. These rose, on a year-on-year basis, by 34.9% - down from the astonishing 41.5% seen in October.

Gas costs have risen substantially across the continent, particularly since the war in Ukraine began.

That was the good news.

The bad news was that food, tobacco and drink prices in the eurozone are still rising on a year-on-year basis - up from 13.1% in October to 13.6% in November. And "core" inflation - the measure that strips out volatile elements such as food, drink and energy - was unchanged at 5% from the October number.

Accordingly, reaction to the figures was muted. Inflation remains at five times the European Central Bank's (ECB) target rate.

Most economists therefore believe the ECB, which only as recently as July took the eurozone out of negative interest rate territory for the first time in nearly three years, will have little choice but to continue raising the cost of borrowing for the time being.

Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said: "The ECB is unlikely to back off from rate increases anytime soon given their focus on core inflation which remains sticky at an uncomfortably high level.

"There also remain upside risks to wage growth and a potential de-anchoring of inflation expectations."

Gurpreet Gill, macro strategist in fixed Income and liquidity solutions at Goldman Sachs Asset Management, added: "Inflation in the eurozone may have fallen this month but remains high at 10%, while core inflation held steady at 5%, driven by both cyclical and structural forces.

"Firm wage growth and high commodity prices are generating broad-based inflation pressures across core goods and services, including rents where inflation tends to be persistent. Wage growth has picked up to almost 4%, above the 3% level considered to be consistent with 2% inflation.

"The ongoing investment required to secure cleaner and more affordable energy sources and to strengthen supply chain resilience will likely contribute to upside inflationary pressures over the medium term. This provides a challenging backdrop for the ECB's attempts to return inflation to its 2% target.

"In the near term, absent a material growth deterioration, risks to inflation are skewed to the upside, implying the ECB rate hiking cycle may continue into 2023."

It is also worth noting that, while the headline rate of inflation in the eurozone has slipped to 10%, it remains appreciably higher than that in many countries using the single currency.

President of the European Central Bank Christine Lagarde has to grapple different inflation rates within euro member states

In Italy it stands at 12.5% and in the Netherlands it is currently 11.2%, although in both countries, it is heading in the right direction. And the Baltic trio of Latvia, Lithuania and Estonia, the eurozone members most painfully exposed to the consequences of Vladmir Putin's war on Ukraine, are still suffering inflation of more than 21% apiece.

Nonetheless, the softer-than-expected November number has persuaded the market that the ECB will not raise rates as aggressively at its next policy meeting on 15 December.

A rise from 2% to 2.75% had been widely expected but a rise to just now 2.5% is now being priced in. That would indeed represent a slowdown for the ECB following two successive increases from 0.5% to 1.25% in September and one from 1.25% to 2% in October.

The other reason why the ECB may also err on the side of caution and moderate the pace of interest rate hikes is because the eurozone, like the UK, is very probably heading for a recession if it is not already in one.

That is also something to which financial markets are pointing.

The market in German government bonds is currently seeing the phenomenon known as "yield curve inversion" - where yields (a measure of the return an investor receives on a bond or a share) are higher for shorter dated bonds than longer dated ones. The yield on two-year German debt currently stands at 2.121% while it is at 1.937% for 5-year debt and 1.928% for 10-year debt.

Yield curve inversion is traditionally seen as a sure-fire indicator that a recession is on the way.

This is a case that has been set out in recent days by some ECB rate-setters.

But others disagree.

Isabel Schnabel, the German representative on the rate-setting ECB governing council, said last week that the bank had only limited scope to moderate the pace of its interest rate hikes because government policies aimed at protecting households and businesses from higher energy prices would themselves keep inflation higher for longer.

She is not alone in holding that view.

Accordingly, while it is good news that the eurozone is seeing a decline in inflation, it is important not to get carried away.

Inflation is merely falling. It remains way above its target rate and it is too soon to say prices have stabilised. Further interest rate hikes from the ECB are certain.


Related Articles

London Daily
Paper straws found to contain long-lasting and potentially toxic chemicals - study
You Are So Beautiful
FTX's Bankman-Fried headed for jail after judge revokes bail
Postmodern Jukebox European Tour Version
Blackrock gets half a trillion dollar deal to rebuild Ukraine
An old French tune (by Georges Brassens) Pomplamoose ft. John Schroeder
Steve Jobs' Son Launches Venture Capital Firm With $200 Million For Cancer Treatments
Sattahip Motor Show 20
Greek PM offers tourists affected by wildfires a free stay in Rhodes next year.
SONATE AU CLAIR DE LUNE - Moonlight sonata
Google reshuffles Assistant unit, lays off some staffers, to 'supercharge' products with A.I.
A kiss to build a dream on
End of Viagra? FDA approved a gel against erectile dysfunction
Wonderful Tonight - Eric Clapton (Boyce Avenue acoustic cover)
UK sanctions Russians judges over dual British national Kara-Murza's trial
Mean Blues
US restricts visa-free travel for Hungarian passport holders because of security concerns
La Chansonnette
America's First New Nuclear Reactor in Nearly Seven Years Begins Operations
Pattaya Addicts
Southeast Asia moves closer to economic unity with new regional payments system
Franz Liszt - Liebestraum - Love Dream
Political leader from South Africa, Julius Malema, led violent racist chants at a massive rally on Saturday
Dream a little dream of me
Today Hunter Biden’s best friend and business associate, Devon Archer, testified that Joe Biden met in Georgetown with Russian Moscow Mayor's Wife Yelena Baturina who later paid Hunter Biden $3.5 million in so called “consulting fees”
Unchained Melody sung like you've NEVER heard!
How “peacekeepers” at the UN spend our American tax dollars.
Dave Brubeck - Take Five
'I am not your servant': IndiGo crew member, passenger get into row over airline meal
Édith Piaf - Non, Je Ne Regrette Rien (Sofie)
Singapore Carries Out First Execution of a Woman in Two Decades Amid Capital Punishment Debate
Rondo Alla Turca
Spanish Citizenship Granted to Iranian chess player who removed hijab
Kiss of fire
US Senate Republican Mitch McConnell freezes up, leaves press conference
Tom Jones - I´ll Never Fall In Love Again 1967, 1989, 2001
Speaker McCarthy says the United States House of Representatives is getting ready to impeach Joe Biden.
Israel Cachao López - Guajira Clásica
San Francisco car crash
Edward Maya - Stereo Love (feat. Vika Jigulina) (Extended Mix)
This camera man is a genius
Strauss - Radetzky March - Karajan
3D ad in front of Burj Khalifa
La vie en rose
Next level gaming
The Temptations - My Girl (Smokey Robinson Tribute) 2006 Kennedy Cent
BMW driver…
Orlando Cachaito Lopez Redencion
Google testing journalism AI. We are doing it already 2 years, and without Google biased propoganda and manipulated censorship
Unlike illegal imigrants coming by boats - US Citizens Will Need Visa To Travel To Europe in 2024
RADETZKY MARCH-2008-Wien, New Year Concert
Musk announces Twitter name and logo change to
Only you (And you alone)
The future of sport
Strangers In The Night
New York City Agrees to Compensate Demonstrators Subjected to Excessive Force and Unlawful Arrests Amidst Widespread Protests
Charles Aznavour - La Boheme
Paul Simon: "I can't perform anymore due to hearing loss"
Summer time
The politician and the journalist lost control and started fighting on live broadcast.
Sting and Stevie Wonder - Fragile (from Sting's 60th birthday concert)
The future of sports
Aux Champs Elysees
Unveiling the Black Hole: The Mysterious Fate of EU's Aid to Ukraine
Stand By Me - Ben E. King (Boyce Avenue acoustic cover)
Farewell to a Music Titan: Tony Bennett, Renowned Jazz and Pop Vocalist, Passes Away at 96
La Mer (Beyond the Sea) – Avalon Jazz Band
Alarming Behavior Among Florida's Sharks Raises Concerns Over Possible Cocaine Exposure
Transgender Exclusion in Miss Italy Stirs Controversy Amidst Changing Global Beauty Pageant Landscape
Nathalie Song by Enzo Petrachi Stjepan Hauser Cello
Joe Biden admitted, in his own words, that he delivered what he promised in exchange for the $10 million bribe he received from the Ukraine Oil Company.
Shape of My Heart - Sting (Boyce Avenue acoustic cover)
Swedish Embassy in Baghdad Engulfed in Flames Amidst a Firestorm of Protests
Radiohead - Creep
TikTok Takes On Spotify And Apple, Launches Own Music Service
Quizás,Quizás,Quizás - Andrea Bocelli - Jennifer Lopez
Global Trend: Using Anti-Fake News Laws as Censorship Tools - A Deep Dive into Tunisia's Scenario
Perhaps, Perhaps, Perhaps - Multi-Couples
Arresting Putin During South African Visit Would Equate to War Declaration, Asserts President Ramaphosa
Pentatonix Havana
House of Commons rejects nine significant amendments from the Unelected, Privilaged House of Lord - Overturn Crucial Migration Bill Amendments in a Bid to Curb Unauthorized Maritime Immigration
Paula Cole - Autumn Leaves
Hacktivist Collective Anonymous Launches 'Project Disclosure' to Unearth Information on UFOs and ETIs
Oscar Benton Bensonhurst Blues
Typo sends millions of US military emails to Russian ally Mali
Muslim Tycoon Asif Aziz Receives Approval for the Transformation of the iconic London Trocadero Landmark into Mosque
Nina Simone - ”I Put A Spell On You”. Vezi aici cum cântă Jeremy Ragsd
Server Arrested For Theft After Refusing To Pay A Table's $100 Restaurant Bill When They Dined & Dashed
NIGHTWISH - The Phantom Of The Opera
The Changing Face of Europe: How Mass Migration is Reshaping the Political Landscape
Motorshow 2016 Tanjay Negros Oriental
China Urges EU to Clarify Strategic Partnership Amid Trade Tensions
Monica Bellucci - Ti Amo
Europe is boiling: Extreme Weather Conditions Prevail Across the Continent
Michael Jackson - Billie Jean Milena The Voice France 2018
Israeli Prime Minister Netanyahu Hospitalized Due to Dehydration Amidst Summer Heatwave
Michael Buble (Help Me Make It Through The Night) feat Loren Allred
Memories Canon In D - Maroon 5 (Boyce Avenue piano acoustic cover)
Matteo Simoni - Marina
Maroon 5 - One More Night
Maroon 5 - Memories
Mark Knopfler - Brothers In Arms (Berlin 2007 Live)
Mark Knopfler & Emmylou Harris - Romeo And Juliet (Real Live Roadrunni
Marina, Marina - The LUCKY DUCKIES intimist live concert at Guimarães
Major Lazer & DJ Snake – Lean On Mauranne The Voice France 2016
Love Theme from Romeo and Juliet - Joslin - Henri Mancini, Nino Rota
LoLa & Hauser - Love Story
Linkin Park Jay-Z - Numb Encore (Live 8 2005)
Hallelujah Mennel Ibtissem, The Voice France Leonard Cohen
Leonard Cohen - Dance Me to the End of Love
Leonard Cohen & Natasha Rostova - Dance me to the end of love
La casa de papel - Bella Ciao
La Camisa Negra
L'italiano (Toto Cutugno) - The Gypsy Queens
Juanes - La Camisa Negra
Jonathan and Charlotte - Britain's Got Talent 2012 Live Semi Final - U
John Powell - Assassin's Tango
Joe Cocker - You Can Leave Your Hat On (LIVE in Dortmund)
Joe Cocker - Unchain My Heart 2002 Live
Joe Cocker - A Whiter Shade Of Pale
Jay Z & Alicia Keys - Empire State of Mind LIVE
Jason Mraz - Im Yours (live)
Jarrod Radnich - Bohemian Rhapsody - Virtuosic Piano Solo
James Blunt - You're Beautiful
James Blunt - You're Beautiful & Bonfire Heart (Live at The Nobel Peac)
If You Go Away - Helen Merrill & Stan Getz (Tribute to Virna Lisi)
I Say a Little Prayer
Hotel California ( Eagles ) 1994 Live
Historia de un amor - Luz Casal. Vezi interpretarea Biancăi Sumanariu
Here Comes The Sun - The Beatles (Boyce Avenue acoustic cover) on Spot
Heart - Stairway to Heaven Led Zeppelin - Kennedy Center Honors
HAVANA by Camila Cabello Zumba Pre Cooldown TML Crew Kramer Pastra
HAUSER and Señorita - I Will Always Love You
HAUSER - Waka Waka
HAUSER - Lambada
HAUSER - Historia de un Amor
HAUSER - Despacito
Great Pretender
Georgia May Foote & Giovanni Pernice Samba to 'Volare' - Strictly Come
Gary Moore - Still Got The Blues
Fugees - Killing Me Softly With His Song
French Latino - Historia de un Amor
For A Few Dollars More The Danish National Symphony Orchestra (Live)
Flashdance • What a Feeling • Irene Cara
Filip Rudan - “Someone You Loved” Audicija 4 The Voice Hrvatska Sez
Eric Clapton - Wonderful Tonight
Enya - Only Time
Enrique Iglesias - Bailando (English Version) ft. Sean Paul
Enrique Iglesias - Bailamos
Elena Yerevan Historia de un amor
Ed Sheeran - Shape of You (Official Music Video)
Ed Sheeran - Perfect Symphony [with Andrea Bocelli]
Ed Sheeran - Perfect (Official Music Video)
Easy On Me - Adele (Boyce Avenue 90’s style piano acoustic cover) on S
ERA - Ameno
ELENA YEREVAN- Cancion Del Mariachi-IN STUDIO-2017 DPR
Dust In The Wind - Kansas (Boyce Avenue acoustic cover)
Don't Let Me Be Misunderstood
Despacito x Shape Of You - Pentatonix
Deep Purple - Child In Time - Live (1970)
David Foster When A Man Loves A WomanIt's A Mans World (SealMichael Bo
Dance me to the end of Love ( Pi-Air Design )
Coolio - Gangsta's Paradise (feat. L.V.) [Official Music Video]
Conquest Of Paradise (Vangelis), played on Böhm Emporio organ
Cielito Lindo
Chico & The Gypsies - Bamboleo
Canción Del Mariachi - Antonio Banderas, Los Lobos • Desperado
Camila Cabello - Havana (Audio) ft. Young Thug
Camila Cabello - Havana ( cover by J.Fla )
California Dreamin' - The Mamas & The Papas José Feliciano (Boyce Ave
Buster Benton - Money Is The Name of The Game
Hallelujah Pentatonix
Bobby McFerrin - Don't Worry Be Happy (Official Music Video)
Bob Dylan - Knockin' On Heaven's Door Emilia The Voice Kids France
Besame Mucho - Cesaria Evora
Ben E. King - Stand by Me Sax Cover Alexandra Ilieva Thomann
Bella Ciao
Beautiful in White x Canon in D (Piano Cover by Riyandi Kusuma)
Bad Romance - Vintage 1920's Gatsby Style Lady Gaga Cover ft. Ariana Savalas & Sarah Reich(1)
BAMBOLEO - Gipsy Kings • Antonio Banderas, Katya Virshilas
BAILANDO (original)
Awesome Ukrainian yodeler - SOFIA SHKIDCHENKO (with English subtitles)
Avicii - The Nights
Atom - The Great Gig in the Sky
Aretha Franklin - (You Make Me Feel Like) A Natural Woman (Official Ly
Antonio Banderas - Cancion del Mariachi (Desperado)
André Rieu - Zorba's Dance (Sirtaki)
André Rieu - Can't Help Falling In Love
André Rieu & Mirusia - Ave Maria
Andrew Reyes Elton John - Don't Let The Sun Go Down The Voice 2020 (
Andreas Kümmert Whiter Shade Of Pale The Voice of Germany 2013 Showd
And I Love You So
All About That Bass - Postmodern Jukebox European Tour Version
Alan Walker - Faded (Piano Cover)
Ain't No Sunshine -- Bill Withers (cover by Canen 12 y.o.)
African music
Adriana Vidović - “Creep” Audicija 4 The Voice Hrvatska Sezona 3
Adriana Vidović - “Believer” Nokaut 3 The Voice Hrvatska Sezona 3
A Fistful of Dollars - The Danish National Symphony Orchestra and Tuva
4 Beautiful Soundtracks Relaxing Piano [10min]
2CELLOS - Whole Lotta Love vs. Beethoven 5th Symphony [OFFICIAL VIDEO]
2CELLOS - Smooth Criminal (Live at Suntory Hall, Tokyo)
2CELLOS - Smells Like Teen Spirit [Live at Sydney Opera House]
13 Year Old Girl Playing Il Silenzio (The Silence) - André Rieu
094.All About That Bass
(Ghost) Riders In the Sky (American Outlaws Live at Nassau Coliseum, 1
(Everything I Do) I Do It For You - Bryan Adams (Boyce Avenue ft. Conn
What a wonderful world
Moon river