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CPI drops more than expected in Europe, Spain’s IBEX 35 looking to break pre-COVID highs

By Daniela Hathorn

12:39, 30 November 2023

European stocks received another push higher on Wednesday as local inflation readings showed a widespread drop in consumer prices in November. The morning kicked off with Spanish CPI which dropped to 3.2% year-over-year, a drop from 3.5% in the previous month and below expectations that were predicting an increase to 3.7%. The monthly reading saw prices drop 0.4%. The morning followed with a few readings of localised inflation in Germany – Brandenburg, Baden Wuerttemberg, Bavaria, Hesse, and Saxony – which all came in below expectations and saw a drop in prices from the previous month. This set up expectations for the national German CPI released later in the day, which followed the regional readings and came in below expectations, both for the headline and harmonised readings. Headline CPI rose 3.2% from a year ago, below expectations of 3.5%. The monthly change came in at -0.4%, below expectations of -0.2%.

As expected, the two stock indices that benefitted the most from the data were the Spanish IBEX 35 and the German DAX 40. The larger-than-expected drops in consumer prices allowed risk appetite to improve as investors became less concerned about the damaging effects of persistently elevated inflation on economic growth. The DAX advanced 1.2% to 16,200 whilst the IBEX gained 1% breaking above the 10,000 mark and pushing to a new three-and-a-half-year high. The Spanish index has risen over 13% in the last month and is just shy of breaking its pre-covid highs. 

Past Performance is not a reliable indicator of future results.

The traction in subsiding consumer prices in Europe has culminated this morning with the release of the Euro Zone CPI data. Once again, the reading has come in below expectations. Headline prices dropped to 2.4% - the lowest level since August 2021 - from 2.9% in October; predictions were for a drop to 2.7%. On a monthly basis, prices have contracted 0.5%. Core inflation remains slightly stickier but has also dropped more than expected to an 18-month low at 3.6%. 

The weaker readings were expected given the setup in localised CPI readings was already pointing to a general drop in inflationary pressures. Nonetheless, the softer reading in the Euro Zone has aided European equities even further. 

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In the FX space, the EUR/USD pair continues to be dominated by the US dollar side of the trade. An uptick in yields is dragging the USD higher which is causing EUR/USD to retrace recent gains, moving back towards the 1.09 mark. Most of this momentum has come from an upward revision in US Q3 GDP to 5.2% from 4.9%, giving once again another insight into how robust the US economy has been, pushing back expectations about upcoming rate cuts. So far the softer CPI reading seems to have had little effect on the pair 

EUR/USD daily chart

Past Performance is not a reliable indicator of future results.

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