Solid eurozone GDP, hot CPI print tank hopes of dovish pivot from ECB

(Alliance News) - Investors can abandon any hopes of a "dovish pivot" from the European Central Bank in the near future, according to analysts on Monday, after decent economic growth figures in the eurozone, and a hotter-than-expected inflation print

According to a flash estimate from Eurostat, on a seasonally-adjusted annual basis, the eurozone economy grew 2.1%, slowing from 4.1% in the second quarter.

The reading came in line with FXStreet-cited consensus.

On a monthly basis, gross domestic product grew 0.2%, slowing from 0.8% in the second quarter. The figure was also in line with consensus.

The year-on-year growth rates were positive in all countries, save for Latvia, which registered a 0.4% decline, Eurostat noted.

"The full breakdown is not yet available for the eurozone, but looking at the countries that have reported the full composition, we expect the positive surprise to have been driven by strong domestic demand," commented Oxford Economics analyst Paolo Grignani.

"Consumption was very likely supported by pent-up demand for services such as travel and tourism after the pandemic while investment was more resilient than expected, despite the rapid worsening in credit conditions and external demand."

However, Grignani still expects the eurozone to enter a recession in the fourth quarter, noting it is a question "how deep the recession will be, and not if there will be one".

The overall picture remains "bleak", according to IG's Bert Colijn: "With interest rates up and the economic outlook uncertain, investment expectations are weakening too. We therefore still expect the economy to contract over the coming quarters,"

Meanwhile, a Eurostat flash estimate revealed eurozone inflation is likely to have accelerated more quickly than expected in October.

On a harmonised basis, eurozone consumer prices are predicted to rise 10.7% annually in October, speeding up from 9.9% in September. The reading was ahead of consensus of 10.2%, as cited by FXStreet.

This marks the first time in history it has reached the double-digit mark.

The main contributor to annual inflation was energy, with prices rising 42% from last October.

This was followed by food, alcohol & tobacco which rose 13% annually, non-energy industrial goods, which rose 6.0%, and services, which saw a 4.4% rise.

On a monthly basis, harmonised consumer prices rose 1.5% in October, heating up from a 1.2% increase in September. The rise considerably overshot the consensus of 0.6%.

"Overall there is still clear evidence that the second round effects of the supply-side shocks to the economy keep pushing up inflation despite moderating demand," said IG's Colijn.

Much was made of a slightly dovish pivot from the European Central Bank President Christine Lagarde last Thursday.

The ECB had said interest rates would need to be raised "further" - a slight change in language after it previously said rates would need to be hiked over the "next several meetings".

The "dovish tweak" caused a sell-off in the euro, which fell back below the dollar shortly after the announcement, Ebury analyst Matthew Ryan said at the time.

However, IG's Colijn maintains that "today's data will provide more ammunition for the hawks to show that there is no need to make a sudden pivot yet".

Oxford Economic's Grignani concurred: "The worse-than-expected inflation in October coupled with today's strong GDP print reduces the likelihood of a quicker dovish pivot."

By Elizabeth Winter; [email protected]

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