From Morningstar:

Markets anticipate flash inflation figures for the Euro area, to be released by Eurostat on Friday, Jan. 5, at 11am Central European Time. Investors are seeking confirmation of the consumer price slowdown experienced last year. The euro area’s annual inflation rate was 2.4% in November 2023, down from 2.9% the prior month, and significantly lower than the 11.1% rate a year prior. Services, food, alcohol & tobacco, non-energy industrial goods, and energy were the most significant contributors to November’s euro area inflation.

Chief European economist Tomasz Wieladek warns against a possible return to pre-pandemic era stagnation and the risks associated with it, arguing that stagnation is more of a threat than persistent inflation. Eurozone inflation peaked at 10.6% in October 2022 and has since declined to 2.4% as of November. Despite core inflation being higher at 3.6%, the disinflation process is well underway.

Inflation data continue to be a significant factor for the ECB’s monetary policy. According to Wieladek, the ECB may initiate a round of rate cuts if growth is weaker than expected or if inflation falls toward the 2 percent target more rapidly than anticipated. Financial markets have already factored in a potential round of rate cuts, and the momentum behind the rally explores the possibility of market euphoria continuing into 2024.

Eurozone’s seasonally adjusted GDP decreased by 0.1% in the third quarter of 2023 after an increase of 0.1% in the previous quarter, and the ECB will also take the economic cycle into account. However, valuations pose the only risk for the market’s continued rally. There is room for enthusiasm to continue from last year into the beginning of 2024, but it’s essential that data in the coming months can confirm what the markets have already priced in.



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