Europe Just Got A Wake Up Call From Its Two Biggest Economies

Europe Just Got A Wake Up Call From Its Two Biggest Economies
Paul Allison, CFA

about 2 months ago2 mins

What’s going on here?

After a few weeks of blissful relaxation, fresh inflation data from Europe’s two biggest economies threatened to shake the region into action.

What does this mean?

France and Germany are pillars of the European economy, churning out everything from household car brands to world-leading hotels. That’s why investors watch the duo so closely: their success or failures often have consequences for the region as a whole. The latest reveal showed that prices in France and Germany were 3.7% more expensive than the same time last year, a bigger increase than the one from the month before. That’s not ideal for budget-strapped Europeans or the inflation-fighting European Central Bank, but because a slight uptick was expected, it’s not panic stations just yet.

German inflation

Why should I care?

For markets: Investing during the winter blues.

It’s not just you struggling to get up off the couch: January tends to be a slow month for economic news, too. So with little to go off, investors have resorted to a strategy traditionally used at the start of the year: sell stocks that climbed high last year, like US tech, and buy ones that did less well and are now trading for cheap, like oil stocks. That’s so common that it’s known as the “January rotation effect”, but don’t count on it sticking. As soon as more concrete information starts revealing itself, investors will lean toward more forward-focused trends.

The bigger picture: Watch your back.

A lot will hinge on inflation this year. Many are expecting prices in Europe and the US to stay on the slope, paving the way for central banks to cut interest rates and give economies room to breathe. But it would just take one nasty surprise to send prices back heavenward, and if they stay higher for longer, central banks could be forced to lean into interest rate hikes again – essentially putting economies on the chopping block.

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