Eurozone inflation slump helps lift market sentiment

• Yen weakens after Tokyo inflation decline and BoJ bond purchases
• Eurozone inflation collapses, driving stocks higher
• US government shutdown edges closer

Asian markets have seen the focus shift to Japan, where a raft of data brought volatility for the yen and Nikkei. The most important figure came in the form of the Tokyo CPI reading which fell from 2.8% to 2.5%. Meanwhile, a surprise BoJ announcement that they are to buy 300 billion yen of 5-10Yr Government bonds helped further drive the yen lower.

The inflation theme has continued into the European session, where a surprise -0.5% contraction in French CPI acted as the precursor to a welcome slump in eurozone inflation. The oversized decline across both core and headline inflation will come as good news to the ECB who have essentially drawn a line under their tightening phase for now. In particular, the move from 5.3% to 4.5% in core inflation marks the first really significant decline for this figure, falling to the lowest level in a year. While headline inflation will typically grab the headlines, central banks are often more concerned with core metrics given that it strips out the factors they aren’t in control of. With that in mind, the theory that tighter monetary policy is only belatedly starting to kick-in has been supported by todays inflation report.

Looking ahead, we edge ever closer to a US government shutdown that adds yet more fuel to the fire for bears. Past experience has shown us that such shutdowns do not always result in catastrophe, with a deal ultimately reached down the line. Nonetheless, this issue highlights the ongoing debt problem that is building in the US, as the rising cost of borrowing sees debt balloon.