Commenting on today’s news about EU Inflation, Pierre Roke, Associate at Validus Risk Management, said: “Eurozone headline inflation came in at 2.8%, hotter than the expected 2.7% and continues to test the downward trend the market had become accustomed to in 2023.
Of late there has been a distinctive gap between money market expectations and the language delivered from members of the ECB governing council. With the miss, we strengthen our belief that the European Central Bank and its committee members will be firmly looking to readjust the market expectations of future rate cuts. Before this inflation print the markets were pricing in 150bps of cuts in 2024, they are now pricing 140bps. As we have said before, this still feels too dovish, and we would expect markets to continue reducing expectations of future cuts on the back of these figures.
Although inflation has remained stickier than anticipated the ECB will be balancing its concerns with this and trying to secure a soft landing. Another concern to be aware of is the conflict occurring in the Red Sea and its effects on the price of shipping. The threat of further supply-side constraints will be a consideration for the ECB going forward – the inflationary pressures caused by the Russia/Ukraine conflict fresh in their memories.
After starting the year above 1.10 the Euro has gradually declined and settled between 1.08 and 1.09 throughout most of January, before dipping closer to 1.08 after last night’s hawkish FOMC meeting. On the back of this small re-adjustment of rate expectations, the Euro will likely again advance vs the Dollar closer to levels seen throughout January. Looking ahead, we foresee more volatility with EURUSD as the respective central banks continue to influence rates with their fights against inflation and pursuit of a soft landing.”
Commenting on this latest EU unemployment data defying recent economic gloom, Tom Hopkins, Senior Portfolio Manager at BRI Wealth Management, said: “EU Unemployment has come in at 6.4%, in line with consensus expectations and the same as the previous months data. This means unemployment in the EU has stayed at its record low, defying recent economic gloom. It’s clear from the data that real economic weakness is not yet feeding through to the labour market. Unfortunately, the continued strength of Europe’s labour market will add to caution among European Central Bank policymakers about the timing of a potential cut in interest rates as they will be concerned that wage growth could keep price pressures elevated. As the year progresses, economists suspect to see a small tick up in the unemployment numbers as economic growth is likely to remain sluggish and consumer demand continues to be fragile.”
Commenting on the EU inflation rate, Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) said:
“The Eurozone inflation numbers are a mixed bag. That inflation continues to moderate is obviously a good thing and does support the notion that the European Central Bank looks set to cut interest rates over the next few months.
But the timing of the first-rate reduction remains quite uncertain, and we think markets have got somewhat ahead of themselves with their expectations of sharp and fast rate reductions.
This is because, even though the headline inflation number continues to decline as expected, it’s still above the central bank’s target and the core measure, which excludes volatile components such as good and energy, surprised to the upside, declining only minimally.
Importantly, services price inflation remained sticky at 4% or so for the third month running and, with wage demands still rather solid, there’s a risk that lowering rates too soon might put the process of achieving price stability at risk.
Because rate hikes have been one of the key detractors to European equities over the past 12 months, the fact that the rake hiking cycle is now behind us should be supportive.
While we still own less European equities than normal, we’ve recently started to slightly increase our equity allocation to this region, where valuations aren’t particularly demanding.
At the same time, we continue to prefer low-volatile stocks in Europe, a strategy that tends to assign a higher weight to defensive sectors such as health care, consumer stables and utilities.
We also reduced our exposure to higher-risk credit while preferring European government bonds. Even though they may be vulnerable if markets where to price out a rate cut or two, over 12 months and in the context of a weak economy, they remain a good insurance policy against recessionary risks.”
