Euro-Area Inflation Holds at Less Than Half ECB Ceiling
Comment of the Day

November 29 2013

Commentary by David Fuller

Euro-Area Inflation Holds at Less Than Half ECB Ceiling

Here is the opening of this informative article from Bloomberg:

Euro-area inflation stayed below 1 percent for a second month, less than half the European Central Bank's ceiling, underscoring the weakness in parts of the euro region's economy.

The annual rate rose to 0.9 percent from 0.7 percent in October, the European Union's statistics office in Luxembourg said in a preliminary estimate today. The median forecast in a Bloomberg News survey of 44 economists was for 0.8 percent. Separately, unemployment unexpectedly dropped to 12.1 percent.

The increasing inflation rate "is largely coming through because of base effects in energy," said Guillaume Menuet, an economist at Citigroup Inc. in London. "Once these start to fall out of the calculation, it's quite likely by the spring of next year we'll have again more evidence of weakening price pressures."

Today's data mark the 10th straight month that the rate has been less than the ECB's 2 percent goal. The central bank unexpectedly cut its key refinancing rate by a quarter point to 0.25 percent on Nov. 7 to prevent slowing inflation from taking hold in a still-fragile euro-area economy. ECB President Mario Draghi said at the time that the region needs record-low borrowing costs to combat a "prolonged" period of weak consumer-price growth and "very high" unemployment.

Euro-area unemployment unexpectedly fell to 12.1 percent in October from 12.2 percent a month earlier. Economists had predicted the rate would stay unchanged, according to the median of 34 estimates.

After this month's surprise rate cut, ECB officials have said they still have options for easing monetary policy. Bloomberg News reported last week that policy makers are considering a smaller-than-normal cut in the deposit rate, currently at zero, to minus 0.1 percent, if stimulus is required.

David Fuller's view

It is no surprise that the Euro region's economic recovery remains weak. However, this does not detract from the ECB's considerable achievements since 'super' Mario Draghi was appointed president on 1st November 2011.

Unfortunately, there is little that he can do about Europe's high costs for energy. Fracking would certainly reduce this problem but it is not happening, at least not yet. I expect monetary policy to remain very stimulative and Draghi may wish to engineer the Euro somewhat lower.

The stimulative monetary policy should cushion downside risk in Euro region stock markets during global correction phases, and support generally competitive European performances during the rallies. There is little chance of any monetary tighten by the ECB over the short to medium term.

The Euro STOXX 50 Index (weekly & daily) appears to be consolidating gains in the region of its rally highs extending back to 2009 and a close back beneath 3000 would be required to delay an upward break beyond the short term. The 'canary in the coal mine' which would provide advance warnings of problems for Euro region stocks is the Euro STOXX Bank Index (weekly & daily). Although currently rangebound, it has rallied over the last seven days far more quickly than it fell during the first three weeks of November. Therefore I would give the upside the benefit of the doubt, provided it does not close beneath 133.


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