Markets look to flash inflation figures for the the Euro area that are due at 11am Central European Time on Thursday, Nov. 30. Investors are looking for confirmation of the decline in the consumer prices. The euro area annual inflation rate was 2.9% in October 2023, down from 4.3% in September. A year ago, the rate was 10.6%.
In October, the highest contribution to the annual euro area inflation rate came from services (+1.97 percentage points, pp), followed by food, alcohol & tobacco (+1.48 pp), non-energy industrial goods (+0.90 pp) and energy (-1.45 pp).
According to Algebris Investment's Global credit team, "Inflation is expected to fall from 2.9 percent to 2.7 percent year-on-year in November. In contrast, the core index (which excludes energy, food and tobacco) is expected to fall from 4.2 percent to 3.9 percent, based on consensus estimates."
Is it time to talk about rate cuts yet?
Not quite. At its meeting in late October, the European Central Bank (ECB) hinted that the cycle of interest rate hikes is over, but added that it is too early to consider interest rate cuts, despite weakening economic activity.
"The market, concerned about slowing growth, is already anticipating several rate cuts over the course of 2024, about 100 basis points below current levels by December 2024, with a first cut as early as spring," said Filippo Casagrande, Head of Insurance Investment Solutions at Generali Asset & Wealth Management Business Unit.
Economic activity in the eurozone contracted in November for the sixth month in a row, albeit at a softer pace than in October, data from a purchasing managers’ survey (PMI) showed last week. The HCOB Flash Eurozone Composite PMI – a gauge of activities in manufacturing and services sectors compiled by S&P Global - rose to 47.1 from 46.5 in October. A reading below 50 indicates a contraction in activity.
Is the Market too Optimistic?
"Inflation continues to move in the right direction, but levels remain high," said Casagrande, to whom the declines of recent months were widely expected. Analysts are forecasting annual inflation at +5.6 percent in 2023 and +2.7 percent next year.
"Looking ahead, we expect core inflation to continue its gradual decline. In recent months we have begun to see a slowdown in services inflation, the one that is most persistent and difficult to normalize. The slowdown in the housing and labor markets, while still in its early stages, will continue to contribute to this disinflationary trend."
"At the same time, we cannot deny that the convergence of inflation toward 2 percent to a sustainable extent remains a long process. Consequently, we understand the reluctance of central banks to anticipate rate cuts at this time. Only a much more pronounced deterioration on the growth side and a consistent rise in unemployment would allow a faster turnaround," Casagrande concluded.
