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Mixed start for the new year

The first day of trading went by, and the the US started the year slightly negative while Europe started strong. The market has received the better than expected French inflation data today (5.9% YOY) with optimism thinking that inflation in Europe might be under control. A slightly deeper analysis will show that inflation is coming down because Europe is slowing down, as can be seen in the chart below. Composite PMI for the EU, an indication of the strength of manufacturing in Europe is in contraction, indicating the euro area is slowing down and might enter into a recession. As central banks keep pushing rates up, we’ll see more demand destruction, and therefore better inflation numbers, but they will need to reverse course to jumpstart their respective economies.

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