The Eurozone had an unexpected jump in inflation numbers for April, leading to a flurry of conflicting reactions on financial markets. Friday’s 0.8% gain in the EuroSTOXX 50 index is emblematic of the risk-on sentiment awakening investors today. Germany’s DAX index performed even better, rising 1.8% and registering its eighth straight day of increases. This positive development in the stock indices occurs alongside increasing worries about inflationary pressures throughout the Eurozone.
Rebounding strongly from the pandemic were the Baltic States, where inflation data released for April showed Estonia topping the region’s with an annual inflation figure of 4.4%. Overall, both the Netherlands and Latvia had annual inflation rates of 4.1%. By way of comparison, France experienced the lowest inflation rate of the Eurozone at 0.8%. Across the Eurozone, inflation spiked up 0.6% month-over-month. This increase indicates continued inflationary pressures that will play a role in future monetary policy decisions.
Rising Core Inflation
The Eurozone’s core inflation rate advanced to 2.7% in April, up from 2.4% in March. This figure came in well above the 2.5% consensus estimate, sending shockwaves through economists and policymakers everywhere. Core inflation is trending upward, suggesting that the underlying inflationary forces may be more persistent than previously believed. This new reality would make the European Central Bank’s (ECB) path to rate cuts much trickier.
The prices for services in the Eurozone followed suit, going up 0.9% month-on-month. The combination of rising core inflation and service prices raises questions about the sustainability of inflation control measures and the ECB’s approach to interest rates moving forward.
Market Implications
The euro was surprisingly strong against the dollar, at 1.1330. This is all happening despite a very hawkish inflation print. Investors don’t seem to be lamenting inflation, but instead considering the inflationary impact on continued positive signals of economic growth. Germany’s two-year Schatz yields were unchanged at 1.73%. That stability promises to make it difficult for recent spikes in inflationary pressures to translate quickly into upward pressure on short-term interest rates.
The picture today presents a difficult conundrum for the ECB. It need not only fight inflation, it should promote inclusive economic recovery. Analysts are looking ahead to forthcoming economic releases and ECB speaking events for clues as to when monetary policy changes may be coming.
Leave a Reply