The market will be keeping an eye on the Eurozone inflation statistics, which will be released by Eurostat at 11am CET on Friday 5 January. Investors are looking for confirmation of the slowdown in consumer prices last year.
The euro zone's annual inflation rate will be 2.4% in November 2023, down from 2.9% in October. A year ago, it was 11.1%.
The largest contributor to euro area inflation in November was services (+1.69 percentage points, pp), followed by food, alcohol and tobacco (+1.37 points), non-energy manufactured goods (+0.75 points) and energy (-1.41 points). points). ).
Stagnation is a bigger risk than persistent inflation
Tomasz Wieradek, chief European economist at T. Rowe Price, said: “Barring more commodity shocks than currently expected, inflation could fall even more rapidly towards the ECB's 2% target.'' There is,” he said.
Wieradek warns of the risk of a return to pre-pandemic doldrums. “This is a bigger risk than sustained inflation,” he said. “If the ECB tightens too soon, inflation could fall below 2% and the eurozone could slip back into stagnation.”
Eurozone inflation peaked at 10.6% in October 2022, but has fallen to 2.4% in the latest figures from November last year. Core inflation, which excludes food and energy prices, remains high at 3.6%, but the process of eliminating inflation appears to be well underway.
“Therefore, with commodity prices stabilizing for several months and economic activity normalizing after the post-COVID-19 excesses, there is no reason to think that the process of deflation will be interrupted in the coming months. ” said Andrea Conti, Head of Macro Research at Eurizon.
Interest rate reduction scenario
Inflation statistics will continue to be an important element of monetary policy in 2024, but the ECB will also consider business cycles.
According to estimates published by Eurostat, the euro area's GDP (seasonally adjusted) in the third quarter of 2023 decreased by 0.1% compared to the previous quarter. GDP in the second quarter of 2023 increased by 0.1%.
“There are two scenarios in which the ECB is likely to initiate a series of rate cuts: first, if growth is weaker than expected; second, if growth is weaker than expected; “If we fall towards the 2% target sooner than expected,” Willadek said.
Will the market's euphoria continue?
Financial markets are already cutting rates and are pricing in a series of rate cuts, but this scenario needs to be confirmed by data in the coming months.
“Basically what drove the market rally in December was the readiness of central banks to cut interest rates and the macroeconomic environment becoming more supportive of equity markets in 2024,” said Michael Field, European equity strategist at Morningstar. I was confident that it would happen.” This situation has not changed, and the inflation and employment statistics released during that time ultimately confirmed this. So from that perspective, it means that the upward momentum is still there and could continue. The only downside to this party is the ratings. European markets have recently moved from being slightly undervalued to being slightly overvalued. ”
Antonio Caballero, head of investments at Generali Insurance Asset Management, also sees room for enthusiasm to continue from late last year into early 2024, but added: It will be important to be able to confirm whether the situation is correct or not.” Indeed, the effects of tight monetary policy and the relative difficulties of some large economies, such as Germany and China, may prompt more conservative assessments of risky investments. ”
