Throughout the past few months the European Central Bank has been staunchly hawkish, refusing to bow to political pressure and market criticism. Today’s economic data gives us clear evidence of why they have chosen to act this way, because inflation pressures are a serious problem.
This morning, German consumer prices were released and according to the numbers, inflation in November reached its highest level in 13 years. Not only are gas prices causing inflation, but also food prices and unfortunately, the strength of the Euro has not done enough to offset that pressure. Also, German business confidence remains unfazed despite the strong currency. To the surprise of the market, confidence for the month of November actually increased, ending a 6-month losing streak. French business confidence was also stronger than expected. These numbers come in stark contrast to the German ZEW survey of analyst sentiment, which fell to a 15 year low. The main reason why investors and analysts have been pessimistic is because they believe that the strong Euro will hurt the economy but so far it hasn’t. Businesses have also done a far better job of predicting the trend of the region’s economic health than investors and we expect this upper hand to continue. As for Switzerland, inflation pressures are actually subsiding with producer prices growing less than expected in October.