Yields Rise and Stocks Fall Following Robust European Inflation Data

EGB yields are heading south again as stock markets move down. Bunds are outperforming despite robust data, after dovish comments from Praet and amid intra-Eurozone safe haven flows as Spanish markets are under pressure again. Puigdemont’s flight to Belgium has dragged other EU countries into the Catalonia conflict and highlighted ongoing political risks. Stronger than expected EU sentiment was offset by a jump in wholesale prices inflation.

ECB’s Praet sees an ongoing need for monetary accommodation. The Executive Board member said in a speech that “deflationary risks have disappeared” and “some measures of underlying inflation have ticked up over recent months, but have yet to show more convincing signs of a sustained upward trend”. He added, however, that “overall inflation developments, despite the solid growth, have remained subdued”, adding that “a substantial amount of monetary accommodation continues to be necessary to secure the gradual convergence of inflation towards our inflation aim”.

Eurozone Sentiment Rose in November

Eurozone Sentix investor sentiment rose to 34.0 in November, from 29.7 in the previous month and higher than previously expected. Both current conditions and expectations readings improved and data ties in with robust PMI readings and other survey data suggesting that the recovery continues at a swift pace.

Eurozone PPI inflation jumped to 2.9% year over year in September, from 2.5% year over year in the previous month. Prices rose 0.6% month over month. A rebound in energy prices was the main reason behind the acceleration in the headline rate, with energy prices up 1.5% month over month, versus 0.7% month over month in the previous month. Excluding energy, rates remained steady at 0.1% month over month and 2.2% year over year.

German manufacturing orders unexpectedly jumped 1.0% month over month in September. Expectations had been for a correction from the strong August number, which was revised up to 4.1% month over month from 3.6% year over year reported initially. The annual rate jumped to 9.5% year over year. The extremely strong data points to a good backlog of orders going into the last quarter of the year and ties in with reports from PMI surveys suggesting capacity constraints, which are adding to a fast pace of job creation and rising price pressures. Against that background, the ECB’s very cautious reduction of stimulus and the ongoing reluctance to commit to a firm end date for QE is looking questionable, but with political risks and Brexit still hanging over Europe, central banks clearly are taking a very careful stance.