A look at the day ahead in European and global markets by Vidya Ranganathan
If the latest inflation data from Germany and Spain is anything to go by, investors betting that the European Central Bank will cut rates by almost a percentage point in the first half of 2025 could be disappointed.
The euro zone’s harmonized consumer price index (HICP), due later today, is expected to have increased by 2.4% in December, compared with 2.2% in November.
Indicators already published show that prices are heating up with a faster-than-expected recovery in inflation reported in Spain and Germany.
This week’s price data will be the last before the next ECB meeting on January 30. Any sign of a further slowdown in inflation would give the ECB the opportunity to ease policy and support a struggling economy.
Energy could be a thorn in the side of the ECB with prices at their highest level in 14 months. Germany’s faster-than-expected inflation in December was due to a smaller fall in energy prices.
It won’t be a repeat of the 2022 hike, but prices are expected to remain high with less gas stored compared to recent years and the end of a decades-old deal under which Russia would supply gas to Europe via Ukraine.
Britain also faces a similar dilemma as wage growth adds to inflationary pressures. Yields on 30-year British government bonds moved closer to their highest level since 1998 on Monday.
At the same time, markets continue to believe that US President-elect Donald Trump’s tariff program will not be as aggressive as feared. And this, even though Trump denied a Washington Post article according to which he was going to be softer.
Asian stocks extended the rally in European and global stocks into Tuesday after U.S. stocks rose for a second day and the dollar fell against developed and emerging currencies.
Major European stock markets jumped on Monday, with 40 up 2.2% and 1.5%. The auto sector jumped nearly 3%, marking its best performance in more than a year.
If US tariffs are significantly lower than those promised by Trump on the campaign trail and targeted only at “critical” sectors, then global growth prospects should improve and the dollar should weaken.
Trump’s refusal kept Treasury yields high ahead of this week’s debt auctions. The 30-year yield is the highest in over a year and is close to 5.00%.
Furthermore, investors are observing the political drama in Canada following the announcement of the resignation of Prime Minister Justin Trudeau.
Main developments that could influence the markets on Tuesday:
Economic data: Halifax UK house prices, Italy CPI, France CPI, Eurozone HICP and unemployment rate, US ISM non-manufacturing PMI
Fed Speakers: Federal Reserve Bank of Richmond President Thomas Barkin speaks in Raleigh
Granting of debts: Germany reopens the auction at 2 years, United States Kingdom (TADAWUL:) reopening of 30-year auction
