European Stocks Surge as German Inflation Declines

By Peter Nurse

European stock markets experienced a significant rise on Tuesday, fueled by news of decreasing inflation in Germany. This development has raised expectations that the European Central Bank may reconsider its aggressive monetary tightening sooner than initially anticipated.

By 04:30 ET (09:30 GMT), the German index was up 1.4%, the French index also rose by 1.4%, and the UK index climbed 2.1% on its first trading day of the new year.

North Rhine-Westphalia, Germany’s most populous and economically significant state, reported that annual inflation decreased to 8.7% in December, down from 10.4% in November and a peak of 11% in October. This drop was attributed to a 12.6% decline in energy prices due to rebates on household fuel bills, which led to an overall 1.0% reduction in the consumer price index from November.

These figures have been viewed positively, suggesting that the European Central Bank may soon pause its monetary tightening approach. However, it is important to note that the overall consumer price index, excluding volatile food and energy prices, still rose by 1.0%, pushing the annual core inflation measure up to 4.9%, compared to 4.6% previously.

Further contributing to the positive sentiment was Germany’s unemployment data, which showed a decrease to 5.5% in December from 5.6% the month before.

Investors have been weighing the mixed implications of China’s economic reopening and the resurgence of COVID-19 cases, especially regarding its potential impact on Europe, given the importance of the Chinese market for many of the region’s largest companies. A private survey released earlier confirmed that Chinese manufacturing activity contracted for the fifth consecutive month in December, with the purchasing managers’ index (PMI) registering at 49.0, down from 49.4 the previous month.

IMF Managing Director Kristalina Georgieva indicated over the weekend that the United States, Europe, and China—the main drivers of global economic growth—are all experiencing simultaneous slowdowns, making 2023 a more challenging year for the global economy than 2022.

Oil prices rose slightly on Tuesday, approaching their highest levels in a month despite the disappointing manufacturing data from China, the world’s largest crude importer and second-largest oil consumer. Traders seem to be adopting a more optimistic outlook on the long-term prospects for China’s economy following the recent waves of COVID-19.

By 04:30 ET, oil futures were trading 0.5% higher at $80.69 a barrel, while the other major contract rose 0.4% to $86.27. Additionally, gold prices increased by 1.1% to $1,846.95 per ounce, whereas the euro fell by 1.1% to 1.0550.