Soft Eurozone Inflation Buoys Equity Bources

Eurozone equity bourses are broadly higher, and yields have moved lower. The Euro is lower versus the dollar and pound as Gilts are outperforming as Sterling strengthens and the 10-year is down. Weaker than expected Eurozone HICP inflation, which fell back but robust growth and better than expected jobless numbers highlight that underlying inflation pressures are slowly starting to build, even if core inflation fell back to just 0.9% year over year in September. The DAX remained closed for a holiday, while Spain’s IBEX continued to outperform as Catalonia’s independence leaders fled the country and unity supports gain in the polls.

The Bank of Japan kept monetary policy steady, despite efforts from its peers in the U.S. and Europe begin to wind down stimulus. The BoJ said in a statement that it is maintaining the short-term interest rate at minus 0.1% and the target for the 10-year government bond yield at zero percent. In an outlook report, the BOJ said it is maintaining its forecast for inflation to hit 2% in the fiscal year 2019/2020. But it now expects core consumer prices to grow 0.8% in the fiscal year 2017/2018, lower than the previous projection of 1.1%. Consumer prices are expected to be up by 1.8% in fiscal year 2018/2019, unchanged from the previous forecast.

Eurozone Q3 GDP decelerated to 0.6% quarter over quarter. The quarterly growth rate was in line with expectations, but with Q2 revised up to 0.7% quarter over quarter from 0.6% quarter over quarter, the slowdown was unexpected. There is no breakdown of the numbers yet and while the data confirms that the recovery remains on track, with the annual rate accelerating to 2.5% year over year from 2.3% year over year. Still, with the annual rate continuing to move up and surveys suggest further strong orders growth, the growth path remains very solid with robust job creation and a narrowing output gap that will also lead to rising inflation pressures going ahead.

Eurozone Inflation Fell Back in October

Eurozone October HICP inflation fell back to 1.4% year over year from 1.5% year over year in the previous month. The number is lower than initially expected, but not a total surprise after the marked deceleration in German HICP reported Monday to 1.5% year over year from 1.8% year over year in September. Negative base effects from energy prices and a deceleration in services price inflation driven to a large extent by the decline in prices for package holidays after the summer were the main reasons for the decline in German HICP. Overall Eurozone numbers showed a similar pattern and energy price inflation declined to 3.0% year over year from 3.9% year over year, while services price inflation dropped to 1.2% year over year from 1.5% year over year. Core inflation fell to just 0.9% year over year from 1.1% year over year.