The recent drop in the inflation rate in some European countries, accompanied by the decrease in the price of raw materials, seems to follow the script of the central banks. Recovery air?
The good news about last week’s inflation rate from France seems to make analysts abandon the hypothesis of a European recession characterized by high inflation rates, ie stagflation. However, the lowering of the price of raw materials confirms fears regarding the economic slowdown: in the past, the biggest recessions were often accompanied by a reduction in the general commodity indices. Many analysts are therefore starting to wonder whether it makes sense to look for signs of recovery among the charts or whether to expect further deterioration in 2023?
Stagflation risk: a look at 2023
2022 was characterized by high inflation and a share market in strong decline in full contrast with previous years. Throughout the year, the central banks’ actions sought to control inflation through the increase in interest rates: the fear for 2023 was that of having to face a moment of stagflation , i.e. a period of time in which there is high inflation and also a lack of economic growth.
Are we in a recession? A look at raw materials
The recent collapse in the price of commodities confirms the start of a possible recession. Taking any ETF or index that summarizes the recent performance of the commodities sector it is possible to notice a discrete downsizing compared to previous years.
Theoretically, after the stock crash, the recession is anticipated by the commodity crash. Analysts feared entering a recessive period while maintaining high inflation which would have forced central banks to further cool the economy, creating many problems. Fortunately, both Europe and America do not seem willing to follow this direction. While the inflation rate is still above central bank targets, the trend has turned from positive to negative, giving the market hope for the future.
Reducing inflation: good news from France
The good news comes from France which recent inflation data shows a slowdown in price growth to 6.7% in December. After the Spanish decrease, the French one represents a second confirmation regarding the effective manifestation of the ECB’s work. Unfortunately, inflation remains high in Germany: this represents the main alarm bell of the European community. In fact, German economic variables have always been a leading indicator of the European situation. The energy variable certainly contributes which, however, given recent events, should have a lesser impact than in 2022.
Markets want a recession
The focus of traders then switches to the arrival of the recession. In both USA and Europe experts are assessing this very probable option and 2023 will be the year of revelation for many. The market welcomes this move, despite the fact that it represents a feverish state of the economy. The reason lies in the fact that reaching this economic stage would bring the markets closer to phase 2, as typically called by intermarket analysts - i.e. a phase of inflation downsizing in which the prices of bonds begin to rise at the expense of yields. That’s when traders might start to show a little more confidence in the equity market, maybe even the technological one. At a forecast level, many experts identify this phase in the second half of 2023, with a view to a richer 2024.
Original article published on Money.it Italy 2023-01-14 07:11:00. Original title: Inflazione: finalmente la luce in fondo al tunnel?
Argomenti
