Danger ‘Zone

Image source: Jim Vallee - Shutterstock

What's going on?

Fresh data out on Friday showed the eurozone economy had a stronger-than-expected third quarter, but it could be the calm before the storm.

What does this mean?

The European economy grew by a better-than-expected 2.2% last quarter versus the one before, showing the US – whose third-quarter growth disappointed last week – how it’s done. Two countries played a big part in the acceleration: France – where consumer spending was particularly strong – and Italy, whose industrial and services sectors came out on top.

Still, the canary in this particular coal mine is starting to look a little woozy: the prices of goods and services in the eurozone were 4.1% higher in October than they were the same time last year. And if that inflation doesn’t let up, it’ll dent both consumer and business spending and, in turn, economic growth.

Why should I care?

For you personally: Look forward, not back.

Thing is, economic growth data is so far in the rearview by the time it’s released that there’s not much investors can do with it. So you’d be better off watching what forward-looking stock market investors are up to for clues on where the economy’s headed next. And despite the highest European inflation data in 13 years, they still seem optimistic: they sent up Air France-KLM’s stock after its encouraging earnings update last week, and Mercedes-maker Daimler’s despite its weaker-than-expected results. That matters: they’re huge companies that between them cover business and consumer spending.

For markets: Investors are forcing the issue.

Investors effectively started betting earlier last week that the European Central Bank (ECB) will raise eurozone interest rates in December next year, but the ECB was quick to say that’s not looking likely. Investors didn’t just not listen: they effectively started betting that the hike will come two months sooner. And the longer inflation stays high, the more likely the ECB is to cave to their predictions.

Originally posted as part of the Finimize daily email.

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