The euro dipped and German stocks hit fresh four-month highs after data showed eurozone inflation fell to its lowest level in more than two years, boosting hopes the European Central Bank will soon cut interest rates.
Eurostat said on Thursday that consumer prices in the monetary bloc increased 2.4% in the year to November, down from 2.9% the month before and below economists forecasts of 2.7%. All items contributed to the decline, apart from unprocessed food prices, noted Eurostat.
“For the third month in a row, euro area inflation surprised markets and forecasters strongly on the downside today,” said Deutsche Bank Research senior economist Marc de Muizon. “The November inflation flash prints confirmed price pressures are coming down quickly across all components of the inflation basket.”
Eurozone inflation spiked to a record high of 10.7% in October 2022, as energy costs in particular surged in the wake of Russia’s full invasion of Ukraine, prompting the European Central Bank to embark on a cycle of interest rate hikes that pushed its deposit rate to the current record high of 4%.
Many ECB officials, including President Christine Lagarde, have been at pains to stress of late that the battle against inflation is not over and they are not minded to start easing policy.
However, with the latest reading showing inflation only just above the central bank’s 2% target — its lowest since August 2021 — and with recent data suggesting the continent’s economy is in a mild recession, “traders are now fully pricing in an ECB rate cut by April 2024, said James Harte, analyst at TickMill Group.
He adds that “pricing for a March rate cut currently just below the 50% level.”
Matthew Landon, global market strategist at J.P. Morgan Private Bank, agreed: “Falling inflation and a stagnant economy could justify ECB cuts as soon as the first quarter of next year in our view. It is looking more and more likely that President Lagarde and co. could lead the developed world into the next cutting cycle.”
The 2-year German government bond yield
BX:TMBMKDE-02Y,
which is particular sensitive to monetary policy moves, fell 3.4 basis points to 2.807%, its lowest since early June. The euro
EURUSD,
declined 0.5% to $1.0925.
The prospect of falling borrowing costs lifted European stocks, with Germany’s DAX index
DX:DAX
gaining 0.5% to trade at a fresh four-month high.
The CAC 40
FR:PX1
in France rose 0.6%, while the U.K.’s FTSE 100
UK:UKX
added 0.6%, the latter supported in particular by strength in energy stocks BP
BP,
and Shell
SHEL,
as oil prices
BRN00,
rose ahead of Thursday’s online OPEC+ meeting.
A notable poor performer in London was Dr. Martens
DOCS,
as shares in the iconic boot maker dived 25% to a record low after a profit warning related to weak sales in the U.S.
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