In
March, consumer prices rose in Europe at an annual rate of 2.4%, slightly below
expectations, giving investors hope that the ECB will initiate rate cuts in June.
However,
concerns about possible shocks persist. As a result, European stock markets,
while not in a hurry to go lower, appear to have temporarily topped out.
What
could hinder an early reassessment of monetary policy?
Let’s
start with overly optimistic data. The analysis of annual growth rates may not
provide meaningful data due to the pass-through effect of the initial
inflationary spike.
In
reality, the figures 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 past three months has now been twice as high as
usual. This can be partly attributed to energy prices and the rebound in
utility costs.
Consequently,
it is premature to speculate on a rate cut by the regulator. Further progress
in curbing inflation is needed to avoid missteps.
In
addition, it is essential to consider the risks of a further rise in prices, of
which there are many—first, the repercussions of worsening global geopolitical tensions.
For
example, confrontations between Iran and Israel could disrupt the global supply
chain. In addition, oil prices would skyrocket, as we have seen above.
Second,
trade wars could lead to price increases. If the EU imposes tariffs on Chinese
cars as early as July, a possible retaliatory response from Beijing is to be
expected.
And, of
course, the uncertainties surrounding Trump’s possible re-election, with his threats
to overhaul trade relations, cannot be overlooked.
Why does
it matter to investors?
Slowing
disinflationary trends pose a challenge for bondholders. If ECB members adopt a
tighter stance on rate cuts, government bond prices could plummet again.
Prolonged
high rates pose a risk of higher costs for companies and, consequently, an
increase in bankruptcies, affecting the bloc’s overall economy.
Not
surprisingly, in the past two weeks, yields on riskier European debt have
reached levels not seen since the onset of Covid-19 and the eurozone debt
crisis more than a decade ago.
Fitch
Ratings predicts the region’s high-yield bond default rate could rise to 4%
this year from 1.7% in 2023, driven by leverage, debt maturities, and falling
yields.
Final
thoughts
Be aware
of macroeconomic data, as something is still being determined. The same goes
for geopolitics. What seems to be the baseline scenario today may be impossible
tomorrow.
And, of
course, keep an eye on the economic calendar to stay
on top of events affecting markets and the global economy.