Euro Area Inflation Holds Firm

Market Trends - 17/04/2015

The disparity between the core and regular CPI figures in the Euro Area managed to see no new developments with both figures meeting expectations.  Core CPI rose at 1.10% annualized pace while regular CPI remained in negative territory at -0.10%.  Although ECB President Mario Draghi’s insistence that inflation will improve in the second half of the year has been bolstered by the recent uptick in oil prices, the growing pace of production from the Gulf and lacking storage capacity in the US might see the recent rally higher fade to the downside and quickly correct.  Lending throughout the Euro Area remains constrained despite Mario Draghi’s efforts to reduce some of the friction by driving down borrowing rates through quantitative easing.  With the available supply of outstanding sovereign debt unlikely to be sufficient for his program’s purchase aspirations, he may be forced to pivot to buying up corporate debt.

Hockey stick inflation expectations from the European Central Bank are impressively optimistic considering the downside risks to the outlook.  With disinflation already circling the Euro Area and lending growth subdued, the threat of medium-term deflation should be a serious concern for the Central Bank as it attempts to boost unconventional monetary policy to its limits.  The drop in UK inflation shows that the deflation problems is not a local issue, but a global concern as nations around the world are faced with falling input prices and weaker trade flows.  The drop in Chinese exports coupled with near-record low shipping rates shows that global trade is the weakest since the last financial crisis and unlikely to rebound as monetary stimulus continues to experience diminishing marginal returns.  Even though European macroeconomic data has improved modestly in the short-term, taking the Euro higher, record shorts show that the international investment community is not convinced that an imminent recovery is in the pipeline.

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