In March, consumer prices in Europe rose at an annual rate of 2.4%, slightly below expectations, giving investors hope that the ECB would initiate rate cuts in June.
However, concerns about possible shocks persist. As a result, European stock markets, although in no hurry to fall, appear to have temporarily peaked.
What could prevent a rapid reassessment of monetary policy?
Let’s start with overly optimistic data. Analyzing annual growth rates may not provide meaningful data due to the pass-through effect of the initial inflationary peak.
In reality, the numbers still exceed the norm.
The average monthly price growth rate from January to March for 2010-2019 was 0.12% in 2017-2019 and 0.34% for January-March 2024.
Thus, inflation in Europe over the last three months has been twice as high as usual. This can be partly attributed to energy prices and the rebound in utility costs.
It is therefore premature to speculate on a rate cut by the regulator. Further progress in the fight against inflation is necessary to avoid missteps.
Furthermore, it is essential to consider the risks of further price increases, of which there are many: first and foremost, the repercussions of worsening global geopolitical tensions.
For example, confrontations between Iran and Israel could disrupt the global supply chain. Additionally, oil prices would skyrocket, as we saw above.
Second, trade wars could lead to higher prices. If the EU imposes tariffs on Chinese cars as early as July, a possible retaliatory response from Beijing can be expected.
And of course, the uncertainties surrounding Trump’s possible re-election, with his threats to reshuffle trade relations, cannot be overlooked.
Why is this important for investors?
Slowing disinflationary trends pose a challenge for bondholders. If ECB members take a tougher stance on rate cuts, government bond prices could fall again.
Prolonged high interest rates pose a risk of higher costs for businesses and, therefore, an increase in bankruptcies, affecting the bloc’s overall economy.
Unsurprisingly, over the past two weeks, yields on the riskiest European debt securities have reached levels not seen since the start of Covid-19 and the Eurozone debt crisis more than a decade ago .
Fitch Ratings forecasts the region’s high-yield bond default rate could reach 4% this year, up from 1.7% in 2023, due to leverage, debt maturities and falling yields.
Final Thoughts
Pay attention to the macroeconomic data, as something is still being determined. The same goes for geopolitics. What seems like the base case today might prove impossible tomorrow.
And of course, keep an eye on the economic calendar to stay on top of events affecting the markets and the global economy.
cnbctv18-forexlive
