A Midsummer Night’s Dream: European Inflation Hangs In There As Euro Imperils Stock Rally

I’m going to go ahead and say the Eurozone CPI print was “just right.”

The flash reading for July came in at +1.3% Y/y, that’s in line (Est. +1.3%), but the core reading was a touch higher than estimates and up a tick from June at +1.2%.


That’s nothing special but we (and I say “we” to include anyone who is long risk assets) probably didn’t want it to be – especially not ahead of Draghi at Jackson Hole and with the euro running like it stole something.

“They need to get a clear story for September or October to make the case of the exit and it’s not going to be easy because core inflation and wages will probably roughly be where they are now,” Nick Kounis, an economist at ABN Amro in Amsterdam said after the numbers hit, adding that “they have to make the case for tapering and that will be based on growth giving them confidence that inflation is going to come back, and that’s the story they will try to sell.”

Right. But then again, the more the numbers are “not too hot and not too cold,” the more optionality they have. And optionality is fantastic – right up until you have to actually make a decision. Because if you have optionality going into a decision, it pretty much by definition means things aren’t clear-cut and when things aren’t clear-cut, the potential exists for a mistake.

Well anyway, EURUSD popped on the news, but it’s been a meandering type of session so far. Some folks have described the overnight as “extremely quiet.” Blame it on summer.

For now, European shares are mostly green, but as Bloomberg’s Mark Cudmore writes, the currency strength is starting to catch up to stocks.

European equities are flagging a longer-term warning for the euro rally. It was the gains in the currency that helped kill optimism on the region’s stocks and now the causality might flow the other way in a negative cycle. France’s CAC 40 and Spain’s Ibex both topped out in May. The DAX Index peaked in June.


And amid global equity bullishness, the steady decline in Europe’s major stock indexes since those peaks is particularly notable. [Here is] the signal that declining stocks are essentially sending: currency appreciation negatively dominates the accelerating growth outlook. That could be interpreted as meaning that euro gains are excessive compared to the economic improvement in the region.




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