European Equities Rally as Eurozone Inflation Moderates in January

French shares surged on Wednesday, posting gains fueled by softer inflation readings across the Eurozone in January. Market participants are now closely watching the European Central Bank’s policy decision scheduled for Thursday, with rate holds widely anticipated. The Bank of England’s announcement is also due the same day, adding to the week’s pivotal economic calendar.

Market Surge Driven by Inflation Easing

The CAC 40 index jumped 77.97 points, finishing at 8,257.47 and marking a 0.95% advance. The uptick reflects investor optimism following Eurostat’s preliminary inflation data, which showed consumer price growth moderating to 1.7% year-over-year in January from 2% in December—precisely aligned with market expectations. On a month-over-month basis, the Harmonized Index of Consumer Prices declined 0.5% in January, suggesting deflationary pressures are beginning to ease pricing pressures across the bloc.

Stock Rotation Reveals Sectoral Strength

Auto and industrial sectors led the rally, with Renault climbing over 3%. Specialty chemicals and air gases surged, as Air Liquide advanced nearly 3%. Telecommunications, luxury goods, and energy played supporting roles—Orange, L’Oreal, and TotalEnergies each gained between 2.7% and 2.9%. Industrials showed broad participation, with Michelin, Pernod Ricard, Stellantis, Safran, and others advancing between 1.5% and 2.3%. Defensive plays including Accor, Vinci, Engie, AXA, Saint Gobain, Danone, Airbus, and infrastructure specialists Eiffage also added 1% to 1.5%.

However, weakness emerged in select corners. Publicis Groupe stumbled over 4%, extending losses for a second consecutive day, while Credit Agricole plunged 3.1% following a 39% drop in fourth-quarter earnings. Capgemini eased 2.3%, ArcelorMittal dipped 1.25%, and financial peers BNP Paribas and Societe Generale posted modest declines.

Economic Momentum Shows Mixed Signals

Beyond inflation, S&P Global’s HCOB Flash Eurozone Composite PMI edged down to 51.3 in January from the prior month’s 51.5, undershooting initial market expectations of 51.8. Services activity cooled to 51.6 from December’s 52.4, while manufacturing unexpectedly rebounded to 50.5 from 48.9, suggesting tentative signs of production stabilization.

For France specifically, activity data proved more resilient than initial estimates. The HCOB France Composite PMI was revised upward to 49.1 from the flash reading of 48.6, though it remained below December’s 50.0 level. French services PMI retreated to 48.4 (revised up from 47.9), compared with 50.1 in the prior month, indicating softening demand for services but stability in the overall trend.

Policy Pivots Ahead

The softer inflation backdrop sets the stage for the ECB’s Thursday announcement, where officials are expected to hold rates steady as price pressures continue their gradual retreat. Combined with the Bank of England’s decision that same day, markets are positioning for potential shifts in policy direction later in the year, even as current economic momentum remains cautiously constructive.