Red-Hot Eurozone Inflation Is Scorching Bulls

Stocks opened lower today on a hot inflation reading out of Germany before rallying through the morning session. Shortly before noon, however, the market pared back its gains significantly, sinking back into the red. The Dow gained slightly while the S&P and Nasdaq Composite held on to minor losses.

Pre-market trading pointed to a higher open this morning before Germany’s most recent Harmonised Index of Consumer Prices (HICP) reading – the European Central Bank’s preferred inflation gauge – spoiled the party. German HICP clocked in at +9.3% year-over-year (YoY) vs. +9.0% expected, up from +9.2% YoY last month.

It marked the first increase in German headline inflation in five months and could be indicative of a coming resurgence in consumer prices. France and Spain both reported hotter-than-expected inflation prints yesterday, too.

Goldman Sachs raised its Eurozone inflation forecast from +8.36% YoY to +8.46% YoY as a result of today’s report. Nearly every price category beat estimates.

“For the [European Central Bank], a sequence of upside surprises to readings for the euro area’s biggest economies is awkward. That the bulk of the misses are accounted for by food and energy is cold comfort,” said Bloomberg economist Martin Ademmer.

German central bank President Joachim Nagel pointed to stubbornly hot core consumer prices as an area of concern.

“One thing is clear: the interest-rate step announced for March will not be the last,” Nagel said in prepared remarks.

“Further significant interest-rate steps might even be necessary afterwards, too.”

That jolted US Treasury yields higher this morning. The 10-year rate jumped from 3.91% yesterday to 4.00% for the first time since November 10th, 2022. Sentiment over short-term rates from central banks (like the fed funds rate in the US) has shifted sharply hawkish in recent weeks.

“We are currently in the chop period between central banks winding down interest rate increase cycles and seeing what impact those increases will have on the real economy,” said US Bank Wealth Management investment director William Northey.

“Performance for the first two months of the year was primarily influenced by marginal changes in expectations for the appropriate path of monetary policy in 2023.”

He continued, adding:

“We anticipate a better environment for bonds but expect ongoing, two-sided volatility for global equities and US equities as market gauges consumer health and corporate activity.”

Greenlight Capital’s David Einhorn offered a more blunt appraisal of the current investing climate.

“I think we should be bearish on stocks and bullish on inflation,” Einhorn said in a midday CNBC interview.

“I think we’re in a policy now, which is probably pretty good for Main Street, but it’s going to be difficult and increasingly difficult for financial assets.”

Einhorn was among the market’s biggest bears last year and remains bearish for the year ahead. Rate-sensitive tech stocks, especially those included in Cathie Wood’s ARK Innovation ETF (NYSE: ARKK), were among Einhorn’s favorite names that he targeted with bearish positions.

And, after today’s hot inflation reading out of Germany, those types of stocks should continue to deliver outsized returns for bears. That will be especially true if additional stronger-than-expected economic data rolls in, like the next US jobs report, due out March 10th.


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