Inflation Surprises in Europe and Japan


Inflation Surprises in Europe and Japan

TUESDAY, 25 JULY 2023 By Vincent David-Robin

Two weeks ago, the US inflation numbers provided some relief as they came in better than expected. However, last week, it was Europe and Japan that sprung surprises. European inflation remains stubbornly high, with both headline and core inflation at 5.5%. This uncertainty around inflation levels has raised questions about the European Central Bank's (ECB) next moves on interest rates.

In contrast, the United Kingdom saw inflation numbers lower than expected at 7.9% and 6.9% respectively. This was positive news and led to a decline in the USD/GBP exchange rate below 1.30, settling around 1.28. Notably, the 2-year gilt yield experienced a substantial drop from 5.30% to 5.00%, providing welcome relief to mortgage holders.

Meanwhile, Japan's inflation rate was significantly higher than expectations at 3.3% for both headline and core. The Bank of Japan (BOJ) has maintained an ultra-loose monetary policy so far, but this unexpected surge in inflation may prompt them to reconsider their approach.

Equity Markets Show Varied Performance

The equity markets displayed mixed performance last week. In the US, most indices were either flat or marginally up, except for the Nasdaq, which fell over 2% due to weaker than expected earnings from Tesla.

In Europe, the FTSE stood out with a strong performance, surging by 3% following the release of inflation data. Investors hoped that the Bank of England (BOE) might halt its rate-raising efforts, leading to this optimistic market response. Elsewhere in Europe and Asia, markets were generally flat to slightly up.

Fixed Income Markets and their Impact on Equities

With the exception of the UK fixed income market, which experienced the positive impact of lower inflation (as mentioned earlier), fixed income markets did not have a significant influence on equities performance last week.

Upward Trend in Commodities

Commodities experienced an upward trend in two key categories. Oil prices moved higher, signalling a potential recovery. Additionally, the collapse of the Russian-Ukrainian grain corridor agreement had implications for wheat and corn markets, providing them with a boost.


In summary, the market saw several surprises last week, with inflation being a key factor influencing decisions by central banks. While European inflation remains elevated, the UK's lower-than-expected numbers were a welcome relief. Japan's unexpectedly high inflation may lead to a change in the BOJ's monetary policy.

Equity markets had mixed performance, with the FTSE standing out with a notable gain. Fixed income markets were less influential on equities, and commodities saw an overall upward trend.

General disclosure:This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Aria Capital Management or any of its related companies to participate in any of the transactions mentioned herein. This material may contain estimates and forward-looking statements, which may include forecasts and do not represent a guarantee of future performance. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. The opinions expressed are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Past performance does not guarantee future results. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.


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