Eurozone Deflation Holds Steady

Position: Long Germany via EWG


We’ve had our EYE on Eurozone inflation and forecast to see mild inflationary numbers into year-end and next. Today Eurostat released Eurozone CPI at -0.3% in September year-over-year, with monthly inflation at 0.0%. While still deflationary on an annual basis, and down from -0.2% in August, we expect a slight uptick in inflation over the intermediate term, buffered by a strong Euro. 


As always, divergences in inflationary/deflationary numbers reflect structural issues on an individual country basis within the framework of the Eurozone, and will remain a political football for the ECB when it considers raising interest rates. As of yet, there’s been little rhetoric on the WHEN, however Trichet has recently signaled displeasure with a strong Euro (now bordering on the $1.50 mark) as it erodes the competitiveness of Eurozone exports.


September inflation data shows a clear divergence among countries:  Ireland and Portugal are experiencing the most deflation, at -3.0% and -1.8%, respectfully. The two largest economies in the region, Germany and France, stood at -0.5% and -0.4%, near the region’s average, while Malta and Finland topped the inflation charts at +0.8% and +1.1%. As before, we continue to believe that structural issues that weighed on certain countries into the downturn will encourage and prolong deflation, and therefore recovery, as we move out on duration.


The major components driving annual CPI deflationary were Energy (no big surprise) and Transport costs, down -11% and -3.7%, while Food and Housing saw declines of 1.3% and 1.6% respectively.  Due to tax and duties, Alcohol and Tobacco saw strong inflationary pressures at +4.4% annually.


Alongside inflation we’re beginning to see upward revisions for GDP growth across the Eurozone. Importantly, Germany was revised up to 1.2% in 2010 (from a recent IMF prediction of +0.3%), with Chancellor Merkel stating that even average growth of about 1% would only show that Germany is “slowly emerging from the trough.”  Yet, she also stressed in a recent speech that Germany’s industrial base shall help the economy outpace many of its peers, a point we agree with. Further, the Bank of Italy said the country emerged from recession in Q3, expanding 1% Q/Q. Cited for stepping up manufacturing, Italy’s push from a Q2 GDP of -0.5% is bullish for an economy that is heavily dependent on trade with the Europe.


As economies melt up, we expect inflation to follow at a relatively stable rate across the region.  We continue to like Germany, including its low inflation environment as it encourages consumer consumption.



Matthew Hedrick



Eurozone Deflation Holds Steady - EACPISEP


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more