EU Economic Update – 01 December 2014

European markets close the week higher on stronger US data and lower inflation for November

European equity markets closed the week higher on Friday as US economic growth figures were revised upwards for the previous quarter while continental inflation moved further south for November, increasing the likelihood of ECB action this side of Christmas.

In detail, the second estimate US GDP number came in at 3.9% vs official projections for a reading of 3.5%. This was while the Federal Reserve’s preferred measure of inflation also edged higher, with the core PCE index for October coming in at 1.6% on an annualised basis.

Despite the North American triumph, the main event for continental investors during the week was without doubt the release of November inflation figures from both Germany as well as the euro-zone as a whole.

Here, the benchmark CPI index fell once again from 0.4% down to 0.3%, while Core CPI (ex energy and food) held steady at 0.7%. Although the resilience of core CPI may offer hope of a rebound in inflation to some observers, we are more sceptical of its relevance and potential impact upon inflation and ECB policy.

This is because falling energy prices are, save for a disruption to Russian supplies, likely to remain with us for some time. Most notably because of reducing demand from North America and the consequent excess supply in international markets, largely driven by US moves toward self sufficiency and energy independence.

The impact of this has now been further compounded by OPEC’s recent decision not to reduce production in order to prop up market prices.

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Looking Ahead

All in all, we see further downside pressure to inflation during the months ahead and believe that this increases the likelihood that the ECB will announce further aggressive measures before February 2015.

Going further, we see the sterner tone of Mario Draghi during recent speeches as denoting already increased pressure to act and believe that this could lead to a move from the ECB this side of Christmas.

At the very least, we expect a further step up in the bank’s rhetoric at the November and December meetings, with more explicit guidance as to what form of additional stimulus the market can expect to see from the Governing Council.   

This would of course be positive for continental equity markets over the near term and as such, we believe that downside risk to portfolio returns is likely to reduce further as we approach year end.

EU Indices (DAX, Black), (CAC 40, Red), (IBEX, Blue)  

EUINDICES01DECEMBER

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