Eurozone inflation data turns negative

Wednesday, January 07, 2015

Concerns regarding the economic growth outlook for the eurozone were confirmed today with the release of eurozone inflation data which saw inflation dip into negative territory for the first time since 2009. Market participants polled by Bloomberg were expecting the CPI estimate for December to deteriorate from 0.3% y/y the previous month to -0.1% y/y. However, substantial deflationary pressure throughout December, largely owing to the sharp declines in the crude oil market, saw the CPI estimate drop to 0.2% y/y. Front month Brent prices have lost over 57% since peaking out above $115/bbl during summer last year, alleviating price inflation pressures but leaving many investors struggling to make sense of the sluggish demand outlook.

The flight to safety became increasingly evident today as the euro extended declines against the dollar, reaching a fresh nine year low as it traded towards 1.1819 at one point earlier in the day, remaining on track to post losses against the dollar for the fourth straight session having started the year just above 1.2100. Ten year German government bond yields touched a fresh record low earlier today as the search for safe harbour gathered pace as yields dropped to 0.432%.

Strong gains in the US dollar presented itself as another obstacle to any potential recovery in risk assets, particularly across the commodities complex, as the dollar index extended gains for a second straight session, briefly breaching 92.00 as the index touched levels last seen in December 2005. The dollar index has rallied strongly over the past few weeks against a basket of major currencies with significant gains against the euro and sterling aiding the climb higher. The index gained over 12.5% last year and has started 2015 on a firm footing having added just under 2% over the past five trading sessions.  

At the time of writing, benchmark equity indices on both sides of the Atlantic were trading higher, putting a stop to the recent market slide. The moves higher, despite the tentative economic backdrop, were catalysed by better than expected US employment data. The release of the ADP national employment report indicated 241K positions were added in December, outstripping both the previous months figure of 227K and median estimates of a 225K increase. Investors received further encouragement from better than expected US trade data with the trade balance for November narrowing the deficit to $39bn from $42.2bn the previous month.

10-year German bond yields dip to fresh low

GDBR10 Index Germany Generic Go 2015 01 07 12 58 02

 Eurozone inflation data drops back to 2009 lows

ECCPEST Index Eurostat Eurozone 2015 01 07 12 48 48

ADP employment data offers some glimmer of hope

ADP CHNG Index ADP National Emp 2015 01 07 13 26 03

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