Morning Bid: Inflation Runs Hot in the Euro Zone

Euro Zone Inflation Heats Up, ECB Rate Cuts in Doubt

A look at the day ahead in European and global markets from Vidya Ranganathan

If the latest inflation data from Germany and Spain is anything to go by, investors betting the European Central Bank will cut rates by almost a percentage point in the first half of 2025 could be in for disappointment.

The euro zone's harmonised index of consumer prices (HICP) is due later today and expected to have risen 2.4% in December, speeding up from 2.2% in November.

Indicators already out show prices heating up with faster-than-expected pickups in inflation reported in Spain and Germany.

This week's prices data will be the last before the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB's next meeting on Jan. 30. Any signs that inflation is easing further would give the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB scope to loosen policy and support a struggling economy.

Energy could be a thorn in the ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB-POLICY-RATES-82f6314e-6203-420b-bc8b-70a978546822>ECB's side with natural gas prices at 14-month highs. Germany's faster-than-forecast inflation in December was due to a smaller drop in energy prices.

It's not going to be a repeat of 2022's surge, but prices look set to remain elevated with less gas in storage compared with recent years and the end of a decades-long deal for Russia to supply gas to Europe via Ukraine.

Britain also faces a similar dilemma as wage growth adds to inflation pressures. British 30-year government bond yields came within a whisker of their highest level since 1998 on Monday.

Meanwhile, markets still believe U.S. President-elect Donald Trump's tariff agenda won't be as aggressive as feared. That's despite Trump denying a Washington Post story saying he will go soft.

Asian stocks extended the rally in European and world equities to Tuesday after U.S. stocks rose for a second day and the dollar fell against developed and emerging currencies alike.

Major bourses across Europe jumped on Monday, with France's CAC 40 up 2.2% and Germany's DAX 1.5% higher. The auto sector surged nearly 3%, marking its best performance in over a year.

If U.S. tariffs are broadly lower than Trump promised on the campaign trail and aimed only at "critical" sectors, then the outlook for global growth should improve and the dollar should weaken.

Trump's denial kept Treasury yields elevated ahead of this week's debt auctions. The 30-year yield is the highest in over a year and closing in on 5.00%.

In other news, investors are watching the political drama in Canada following Prime Minister Justin Trudeau's announcement that he will step down.

Key developments that could influence markets on Tuesday:

Economic data: UK Halifax house prices, Italy CPI, France CPI, Euro zone HICP and unemployment rate, US ISM non-manufacturing PMI

Fed speakers: Federal Reserve Bank of Richmond President Thomas Barkin speaks in Raleigh

Debt auctions: Germany reopening of 2-year auction, United Kingdom reopening of 30-year auction

(Editing by Sam Holmes)