All the action in Europe overnight

Key Highlights

• Negotiated wage growth in the Eurozone accelerated to its highest level since the common currency was introduced in 1999. The rate of growth in the third quarter was +5.4%, compared to +3.5% in the previous quarter, and was largely driven by Germany. The country recorded an +8.8% increase in wages, though the Bundesbank (the German central bank) said this was the likely peak. While this result is likely to spur the hawks within the European Central Bank (ECB), most still expect the central bank to cut rates in December. In fact, market pricing was basically unchanged, with nearly 30bps of cuts expected. This is partly due to the ECB’s expectations of easing pay growth next year (there are some subtleties between overall pay growth and negotiated wages), but also their forecasts for growth. Remember last month (when the ECB cut its deposit rate for the third time this year), the ECB suggested that quicker action may be on the cards. President Lagarde said, rather dovishly, that “The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity.” Additionally, it was mentioned that the outlook has more downside risks (from growth effects) than upside ones. There is no doubt that this wages result is a concern if it does lead to a rebound in inflation; we will have to wait to next week when the EU gets its latest reading to see whether there are any signs of reacceleration.
• A quick look at UK inflation, where the results came in higher than expected and reinforced that a rate cut in December (which already seemed very unlikely before the results) is even less of a chance. In fact, what the results have done is push back the chances of rate cuts in 2025. The headline rate came in at +0.5% MoM and +2.3% YoY (both 0.1 percentage points higher than consensus), with the core rate at +3.3%. Concerningly, services inflation reaccelerated to +5.0%. The Bank of England’s comment that “the process of normalising rates will be gradual because the disinflationary process is easing” seems more than justified in this context.