The probability of an ECB rate hike this year tumbled after last Friday’s CPI release. Mr Draghi has duly reaffirmed the central bank’s commitment to negative interest rates this morning. Core inflation remains very low and may even be overstated. Some of today’s benign inflation reflects the inevitable impact of tech disruption, which is leaving its mark even on the Eurozone.
Nevertheless, house prices are accelerating in core countries. The service sector PMI in Germany was the strongest in 15 months, pushing the composite PMI to a 70-month high of 57.1. France was encouraging too: the services PMI climbed from 56.4 to 57.5, close to a six-year peak.
The potential for economic recovery in France has been outlined in a number of commentaries. Emmanuel Macron’s strong showing against Marine Le Pen in Tuesday’s Presidential debate will bolster his chances next month. If he wins, France could continue to surprise on the upside.
Eventually, the ECB will struggle to balance the policy requirements for a “two-speed” Eurozone. However, the determination of Mr Draghi to keep rates on hold will be positive for equities.
Summary
- Nevertheless, negative rates pushing house prices sharply higher in core countries, including Germany
- French election key – a Macron win suggests France could surprise on the upside
- Strong France will isolate Italy
