The CAC index has recorded small gains to start off the week. Currently, the index is currently trading at 5240.50 and is up 0.15% on the day. In economic news, it’s a quiet day. On the release front, Eurozone Final CPI edged down to 1.3%, matching the forecast. On Tuesday, the eurozone releases ZEW Economic Sentiment, with the markets expecting a strong reading of 37.2 points.
After a break for Bastille Day on July 14, French markets are back in action. President Emmanuel Macron hosted US president Donald Trump during the holiday. Macron is eager to make France an important player on the global stage, and is taking advantage of political and economic developments. Given that Trump and German chancellor Angela Merkel have a frosty relationship, Macron could serve as a go-between, as he has good relations with both Trump and Merkel. As well, France is eyeing Brexit as a golden opportunity to expand its financial sector and attract lucrative financial sector jobs which are leaving London. Many European companies will be downsizing their London operations, and the French are actively courting companies to consider moving to Paris. The first full round of Brexit talks began on Monday in Brussels, with the sides having agreed to first discuss the rights of EU citizens in the UK and Britain’s bill for leaving the EU, before talks on a new trade agreement begin. With significant gaps between the parties on both of these issues, the negotiations promise to be difficult.
Although the eurozone economy has shown improvement in 2017, inflation remains at low levels. Eurozone Final CPI edged down from 1.4% to 1.3% in June, marking its weakest gain in 2017. Germany may be the catalyst of the eurozone’s economic recovery, but the bloc’s largest economy has not been immune to low inflation. Final CPI improved to 0.2% in June, compared to -0.2% in May. The ECB has set an inflation target of 2%, but German and eurozone inflation numbers remain well below that threshold. The ECB has acknowledged that economic conditions have improved, but insists that it has no plans to taper its ultra-loose monetary policy unless inflation levels move higher. The current asset-purchase plan is scheduled to wind up in December, and we’re unlikely to see any changes in monetary policy unless inflation moves considerably higher in the second half of the year.
With the US labor market close to capacity and the unemployment rate at just 4.4%, economists are puzzled why this hasn’t pushed inflation to higher levels. The Federal Reserve is also at a loss to explain the lack of inflation, but Fed Chair Janet Yellen insists that it’s only a matter of time before inflation moves higher. In testimony before a Senate committee last week, Yellen insisted that it was "premature to conclude that the underlying inflation trend is falling well short of 2 percent", and that with a strong labor market "the conditions are in place for inflation to move up". However, the markets remain skeptical that the Fed will make a move before the end of the year, with the odds of a December hike at just 43%, according to the CME Group.
