Equity markets reacted last week to stubborn inflation figures and the continued mixed showing from corporate earnings releases.

Bond yields rose on the back of inflation figures and hawkish noises from several members of the Fed’s FOMC. The US 10-year yield stands at 3.80% and its German equivalent at 2.45%.

Bond yields rose on the back of inflation figures and hawkish noises from several members of the Fed’s FOMC.

US consumer prices rose by 0.5% month-on-month in January but this represented a slight slowdown to 6.4% year-on-year, a whisker above the consensus of +6.2%. Core inflation excluding energy and food rose by 0.4% month-on-month in January, or 5.6% in year-on-year terms. Producer prices also rose at a faster pace, edging up by 0.7%

in January month-on-month, bringing the 12-month trend to 6.0% (versus the +5.4% forecast). These figures reinforce the outlook for a prolonged tightening cycle, as advocated by the Fed. Two more hikes in March and May are now priced in by the markets. The pivot is still expected in the second half of the year.

US retail sales surprised to the upside with a 3% increase in January, the strongest jump in two years, driven by car purchases. This reflects an economy that is resilient to rising borrowing costs and buying more time before a possible recession.

The labour market remains in strong shape, with initial jobless claims clocking in below expectations at 194,000 compared to a forecast of 200,000.

The labour market remains in strong shape

In Europe, German producer prices accelerated more than expected in January, rising by 17.8% year-on-year on the back of energy costs. Growth in French consumer prices was stable at 7% year-on-year.

UK consumer prices slowed to an increase of 10.1% year-on-year in January, down from 10.5% in December, while retail sales edged up by 0.5%.

The S&P 500 ended the week down 0.28% while the tech-heavy Nasdaq, more sensitive to interest rate expectations, advanced by 0.59%. The Stoxx 600 Europe index gained 1.40%.

The corporate earnings season continues this week. Eurozone inflation figures and US core PCE, the Fed’s preferred inflation metric, will be released on Thursday.

Source: Bonhôte

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