The EuroZone Inflation To Bolster Case for More Easing

Markets had what looked to be a contradictory move on Monday: Data was released showing the economy was troubled, but the stock market went up. That illustrates just how dominant the central bank narrative is for markets. Given the heated debate among policymakers over what to do about interest rates in the shared economy, the Euro would likely see increased volatility later in the week with the release of key data points.

With the Eurozone inflation continuing to trend downward, it’s established that the European economy is underperforming. Some might even say it’s stagnant, which isn’t all that new given the financial history of the region from at least 2011. But the latest, freshed data, flashed new warning signs for growth. Without a vibrant economy to support monetary circulation, inflation would likely to soften. And that would mean the dovish side of the ECB monetary policy debate could win out ahead of next month’s rate decision.

Bad News is Good News

Europe’s manufacturing sector has been in contraction for years, at this point, with the shared economy relying on expansion in the services sector. The latter saw a bump higher in July andAugust, but that was seen being driven by the Paris Olympics. On Monday we saw preliminary PMIs for September, post olympic effects, and it came in sharply lower and worse than expected. Services is the mainstay of the European economy, and it has essentially flatlined heading in autumn, when activity is generally lower.

The Eurozone inflation in the services sector was the main argument of the ECB hawks arguing for a more cautious rate-cutting path. But with Germany and now France falling into contraction, it’s not a matter of a “sick man of Europe” situation. It’s a generalized trend in the shared economy.

Can the ECB Help?

This harkens back to the pre-pandemic Draghi era of negative rates and slow inflation. While this might be a negative situation for the citizens of Europe, the easier monetary policy is seen supporting equities growth. Thus, stocks move higher even though there is bad news, as the case is made for more rate cuts.

Another feature of the pre-pandemic low interest rate period were constant reminders from the ECB that the bloc needed to engage in “structural reforms” to generate organic growth. There is only so much that can be accomplished by lowering rates. Specifically, lower rates means people can borrow more money and expand the monetary base. But that has no impact on high energy prices, or regulatory costs, or resolving the trade dispute with China.

What the Market is Looking For

Thus, the Eurozone inflation might remain relatively high, giving the hawks ammunition to make their case. French September flash inflation is expected on Friday, where its forecast to remain unchanged at an 1.8% annual rate. Despite the slowdown in its economy, German inflation is actually expected to pick up the pace to 2.1% from 1.9% when it’s reported on Monday.

So far, the data has pointed to investors expecting the doves to get more support. That has left the benchmark european bonds rate to drift lower and drag down the Euro, despite the easing environment in other economies.

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