Markets rallied late last week as eurozone inflation came in below expectations (more info below). However, there are a couple of intricate details which could do with some further scrutiny. Firstly, base effects play an important role here. This is the impact of the year-on-year nature of the figures and how it plays out. We saw a huge spike in energy prices in the first quarter of 2022. All the major components of this sector (Brent, WTI, Gas, Coal) have all seen at least double digit falls over the last 12 months. This has a big influence in the overall on the inflation calculation. Simply put, the price of oil and gas couldn’t continue to rise at the same rate.
A second important point to note is the difference of headline and core inflation. Core inflation is still proving to be stubborn. Given this reading strips out more volatile inflation inputs (such as oil, which has even seen a large increase this morning due to OPEC+ supply cuts) and is in fact still rising within the eurozone. Whilst interest rate expectations have been influenced by recent banking sector developments, the core inflation figure suggests that the ECB will continue to raise rates throughout Q2 of this year. However, given this is in line with market expectations, markets looks set to take the moves in their stride.
Weekly Investment News
Last week saw US stocks post gains as investors re-evaluated the trajectory of monetary policy. US stocks finished Q1 of 2023 in positive territory on Friday, after a volatile close to the quarter. Much of the positive sentiment has been attributed to the tech sector, which outperformed and offset some of the losses seen in financial sector stocks recently, which suffered due to the recent banking sector turmoil. Optimism in markets was extended last week with the release of US core PCE, the Federal Reserve’s preferred measure of inflation. The price index, which excludes the volatile food and energy sectors, increased by 0.3% for the month of February. This figure was below the consensus estimate of 0.4% and also below the previous month’s 0.5% increase. The lower inflation reading lead some investors to anticipate softer monetary policy from the Fed. The Federal reserve has engaged in its most aggressive rate hiking policy in four decades over the last number of months, raising the benchmark interest rate nine times since March of 2022 in a battle to tame inflation. Lower policy rate expectations have seen positive sentiment in markets, with many investors hoping for an end to bear market conditions.
Markets in Europe followed a similar trajectory last week, finishing the first quarter of 2023 in positive territory. The release of Eurozone inflation data last week was a key factor in improved investor sentiment with the headline figure being its lowest in over a year. The report, released by Eurostat last Friday, indicated that consumer prices in the Eurozone increased by 6.9% year to date in March, down sharply from 8.5% in February. The figure came in lower than economists’ expectations, with much of the decrease being attributed to lower energy prices. There were however some calls for caution as core inflation, which is often viewed as a more accurate gauge of price pressures, came in at a record high of 5.7%, up 0.1% from the previous month. It remains to be seen how policy makers will react in due course.
Source: Zurich Life Insurance