Deflation Risks Subsiding
Leading indicators and the harmonised index of consumer prices (HICP) reading for November suggest that the eurozone is growing fast enough to escape deflationary territory, which will offer some relief to the region's monetary policymakers. The flash estimate for November HICP was 0.9% y-o-y, up from 0.7% in October, and would have been stronger were it not for the weak inflation print from Italy, where HICP was down 0.4% month-on-month and up 0.6% y-o-y (below consensus estimates of 0.0% m-o-m and 0.9% y-o-y).
Further supportive of our view that recovery will continue into 2014 is the Euro-coin economic activity indicator, compiled by the Centre for Economic Policy Research and the Banca d'Italia, which has proven to be a good leading indicator of growth over recent years ( see chart above). The index rose to 0.23 for November, the third consecutive month in the black and the highest reading since July 2011.
This optimistic outlook is clearly not without caveats, with France and Italy still representing the most significant risk to any sustained recovery. Weak German retail sales data for October also questions to what extent German consumption will aid the eurozone internal rebalancing story through 2014. Nevertheless, on balance the picture looks to be one of improving growth over the next few quarters - we forecast eurozone real GDP growth of 1.0% in 2014, from an estimated -0.4% this year - and this should provide support for regional equities, particularly banking stocks, which continue to trade at heavily discounted valuations. Indeed, after a period of consolidation our bullish view towards eurozone banks (played via the MSCI EMU Financials Index and up 9.7% since initiation on September 24) is again starting to look constructive from a technical perspective, with a break through the 53.50 level paving the way for a move back towards our 60.00 target.
|Eurozone - Real GDP Growth, % chg y-o-y and Euro-Coin Index|