What’s going on here? Data out on Tuesday showed that eurozone inflation dropped below the European Central Bank's (ECB’s) target for the first time since the middle of 2021. What does this mean? Inflation in Europe fell to 1.8% in September – admittedly, as expected – from 2.2% in August. Even core inflation, which doesn’t count volatile food and energy prices, fell to 2.7%, thanks to slower rises in services prices. So, while the ECB’s already started cutting interest rates, its previous hikes were vindicated. And the data should clear the path for the central bank to cut rates for the third time later this month, a plan it’s previously hinted at. So now, traders are betting there’s an 85% chance of a cut in mid-October, up from 25%, while some expect a fourth trim before the New Year bells ring. Why should I care? For markets: Following the trail of breadcrumbs. The hint of another cut caught a handful of analysts by surprise. So, desperate to save face, they scrambled to update their outlooks. Bank of America, for one, was previously expecting a rate cut in December but just changed its mind to an October cut. Deutsche Bank’s economists offered a mea culpa too, making the same update. Goes to show, for all the resources the pros have, it’s very easy to (probably) get things wrong. The bigger picture: Germany’s on the ropes. An important survey out last month showed that European investors are losing faith in the region’s economy, with Germany posting the biggest drop in optimism. That makes sense: the country – which just so happens to be the eurozone’s biggest economy – is at risk of falling into a full-blown recession. And sure, lower rates should support the overall European economy, but they might not be enough for Germany – whose all-important carmaking industry is on a very rocky road. | 
