By Steven Levine, Senior Market Analyst, Interactive Brokers

French and Euro Area Inflation: Les Misérables

The European Central Bank (ECB) Thursday committed to combatting continued muted inflation across the Eurozone, amid lower prospects for growth, with a more dovish stance on monetary policy.

The central bank lowered its expectations for annual HICP across the board due in large part to its “more subdued near-term growth outlook.” The ECB anticipates HICP inflation to come in at 1.2% in 2019, 1.5% in 2020 and 1.6% in 2021. In mid-December 2018, the ECB expected those rates to register 1.6%, 1.7%, and 1.8%, respectively.

Euro area real GDP increased by 0.2% quarter on quarter in the fourth quarter of 2018, following growth of 0.1% in the third quarter on the back of a sharply weaker manufacturing sector. The ECB thinks real GDP will rise by 1.1% in 2019, 1.6% in 2020 and 1.5% in 2021, down from December’s outlook of 1.7% in 2019 and 2020.

Meanwhile, among the economic releases in the euro area in the week ahead, France is due to provide a picture of its inflation rate for February.

Thursday, March 14

• France - CPI (Feb)

France’s Consumer Price Index (CPI) report, slated for release Thursday, March 14, falls at the heels of a slower rate of inflation in January, which contributed to stubbornly low levels across the broader euro area.

In January, France’s CPI fell back by 0.4% month-over-month, after having stabilized somewhat in December. Prices of manufactured products plunged 2.1%, accompanied by a deceleration in services and food costs. However, tobacco prices rose by 0.8%. Year-on-year, consumer prices slowed for the third consecutive month.

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The lower rate of inflation appears symptomatic of the ECB’s struggles to lift prices across the continent.

In line with the ECB’s aim to ensure inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium-term, the central bank Thursday elected to keep its key interest rates unchanged at 0.00% (main refinancing operations), 0.25% (marginal lending facility) and -0.40% (deposit facility), where they will most likely remain through the end of 2019.

Also, among other easing measures, the ECB said it will reintroduce its quarterly targeted longer-term refinancing operations (through a new TLTRO-III series), which will be launched in September 2019 and end in March 2021.

Briefing.com’s chief market analyst Patrick O’Hare noted the ECB’s latest monetary policy position “can be categorized easily as being dovish-minded, which is why stock market participants appear to be pleased with how bad things are, economically speaking, and how good things are from a monetary policy standpoint. Low rates -- and even negative rates -- are manna for risk assets like stocks.”

O’Hare continued that the ECB’s policy composition is not for “an economy in good form -- far from it. That is the policy composition for an economy that is stuck in a low-growth rut and is considered to be at risk of sinking further into that rut.”

He added that the question remains: “how far can these equity markets run on a rehash of monetary policy that has already carried them a long, long way from their 2009 lows and which, in the case of the eurozone at least, didn't prove to be enough to extricate the eurozone from its economic morass for very long.”

Following the ECB’s statement, France’s CAC 40 and the Euro Stoxx 50 were each lower intraday Thursday, having fallen nearly 0.50% and 0.60%, respectively. Meanwhile, the iShares MSCI France ETF (EWQ) – with top holdings that include oil giant Total (NYSE: TOT) and pharma firm Sanofi (Nasdaq: SNY) – shed more than 1.1% on the day.

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In terms of inflation, according to Eurostat’s flash estimate, the euro area’s annual Harmonized Index of Consumer Prices (HICP) inflation was 1.5% in February 2019, after 1.4% in January, reflecting somewhat higher energy and food price inflation.

The ECB said that, on the basis of current futures prices for oil, “headline inflation is likely to remain at around current levels before declining towards the end of the year,” and measures of underlying inflation “remain generally muted”.

Although the cost of crude had been on a steep downward trajectory in the fourth quarter of 2018, it has reversed course somewhat, amid U.S. sanctions on Iran, Venezuelan volatility, as well as certain OPEC and non-OPEC, led supply cuts.

However, France’s national statistics bureau, the National Institute of Statistics and Economic Studies, or Insee, said energy inflation fell sharply in January 2019. The gauge rose 1.9% year-on-year following an 8.0% spike higher in December and an 11.2% surge in November.

Insee attributed the January drop to a pronounced slowdown in petroleum products prices (+0.2% year-on-year after +9.5%), while gas costs also decelerated (+12.7% year-on-year after +22.5%).

Against this backdrop, Total’s shares were down around 0.61% intraday Thursday after having recovered roughly 13.9% of their value since their latest 52-week low set December 24. The current crude oil futures contract was last trading at around US$56.62, up a little more than 0.70% on the day, according to the IBKR Trader Workstation.

Friday, March 15

• IEA Oil Market Report

Investors can glean more information about France’s economic landscape in the week ahead, with its International Energy Agency (IEA) set Friday, March 15 to deliver its oil market report. 

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In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.