Chart Chart Chart

Chart of the Week : EZ inflation surprise index jumps to its highest on record

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance. This week, we focus on Citigroup’s inflation surprise index which measures inflation figures relative to market expectations. Our chart compares the evolution of inflation surprises in the United States and in the eurozone.


Click here to download this week's full edition of Macro Chartmania. More than 100 charts to follow the latest market and macro developments.

Our chart shows that for the eurozone, the level of surprise has hit its highest level on record. Inflation surprises have run comparatively hotter in the eurozone than in the United States where they have peaked. The market has clearly underestimated the inflation risk in the region – and there may be more upward movement to come in the short term. The eurozone price producing index for November will be released later this morning (at 1000 GMT). Expect a new surge to 22.9% year-over-year versus prior 21.9% in October. This will fuel a higher consumer price index in the coming months. The increase in prices is becoming so painful that companies have no other choices but to pass along costs to consumers to preserve margins.

What are the drivers behind this acceleration ? Are they here to stay ? Base effects are a significant contributor. But it should not play a major role any longer. The removal of VAT base effects in Germany (which is a key contributor to the overall eurozone inflation) ensures a fall from Q1 onwards. There is also an emerging debate about wage-price spirals in the eurozone. Wage agreements have indeed been higher in several countries (especially Germany). But there is no evidence in the recent data that the eurozone wage pressure is building up. On the contrary, supply bottlenecks coupled with higher energy prices are two major factors behind the rise in inflation. Bottlenecks in Asia will be persistent as long as China follows a strict zero Covid strategy. Don’t expect China to re-open its borders this year (see this excellent article from The Economist). On 3 January, Moller Maersk, the world’s largest container shipping company, indicated that transportation bottlenecks are not coming to a halt any time soon. The company expects that transportation costs will stay elevated most of 2022. The question remains whether the recent fall in energy prices (particularly natural gas prices) will persist. Without any spare gas production capacity left in Europe, the demonstrations in Kazakhstan – a net gas exporter (15 bcm in 2020) could have an impact on the local production and push European gas prices higher again, in the short term. But the energy component (9.5% of the headline HICP) could ease from March/April onwards with better weather conditions. That being said, we believe inflation will remain on average still uncomfortably high this year in the eurozone. It will thus seriously challenge the European Central Bank’s accommodative stance. The services component (41.8% of the headline HICP) could still be a headache, in our view. The second biggest increases in prices were seen in services in November’s data, just after energy. There is no clear indication this will ease anytime soon. This was confirmed by the release of the eurozone December final services PMI yesterday morning. Although there was a marginal easing of price pressures, the eurozone is still in excessively hot territory – increases in both input and output costs were the second-quickest on record.

How could the equity market perform in a regime of higher inflation ? Inflation has been a volatility-driver for the equity market. Historical returns for the equity market tend to be lower when inflation surprises are higher. There is also the historical tendency for small cap stocks to perform significantly better in those high inflation surprise zones than tech and large cap stocks. The simple explanation behind that is smaller companies can manage inflationary pressures more quickly than larger ones. Small caps serve as refuge from price increases for investors in periods of higher inflation. This will certainly happen again in 2022.

See our Inflation Watch to find out how the return of inflation could impact the financial markets and get actionable investment insights and strategies.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.