READING THE PATIENT’S VITAL SIGNS

When looking at Europe we've cautioned against reading too much into aggregate EU/Eurozone data as we believe markets there are often uncorrelated and influenced by varied underlying fundamentals.  Today's report from EuroStat estimated that June inflation in the Eurozone fell 0.1% from a year earlier will give investors a general metric of guidance for Europe, yet the averaged number misses the mark for further understanding the divergence between economies.

One important take-away from today's report is that, as with the US, energy was a major driver -down by 11.8% Y/Y in this latest reading. The deflationary pull from energy should come as no great surprise based on last year's spiking oil price. Core inflation, which excludes energy and food prices, slipped to 1.4% on an annual basis, from 1.5% in May. Conversely, total CPI rose on a monthly basis 0.2%.

This year we've held the position that countries with economic leverage will outperform those with financial leverage. Sticking to inflation, we're seeing countries with financial leverage (think loan leverage combined with a real estate bust in Ireland and Spain) see measured deflationary pressure on an annual basis (Ireland -2.2% and Spain -1.0), whereas Germany, a country we've been bullish on due in part to its fiscal conservatism, posted annual inflation at 0.0%, a level we believe is healthy on a relative basis as the country works through the constraints of reduced export demand.  In contrast we see disinflationary pressure in the UK (outside the Eurozone) on an annual basis, with CPI at 1.8%, from 2.2% in May.

In an environment in which output and wages have decline greatly, with soaring unemployment rates and credit tightening, we're likely to see deflationary pressure continue in the immediate term through much of the Eurozone. June's retail sales number declined for the 13th consecutive month; it's clear that retailers are lowering price to move inventory while consumers have tightened spending and are anticipating lower prices going forward. 

We'll continue to monitor the patient on an individual country basis, while recognizing the importance of the collective health of the EU for individual countries.

Matthew Hedrick
Analyst

READING THE PATIENT’S VITAL SIGNS - Eurocpi2


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