Inflation in US and Europe Higher than Expected


Inflation in US and Europe Higher than Expected

Monday, May 29, 2023 By Vincent David-Robin

Last week was a busy one which saw plenty of releases.

On the economic front, inflation in the UK was higher than expected, at +8.7%. Germany experienced negative GDP growth for Q1 (at -0.3%), making it two quarters in a row – a so-called “technical recession”.

Fed Rate Cuts Rather Unlikely

Across the Atlantic, inflation was also higher than expected in the US – at +4.4% according to the Personal Consumption Expenditures (PCE) price index. As was the GDP for Q1, at +1.3%.

As a direct result of that, expectations of more rate cuts were taken off the table in the Treasury curve; and less than 50 basis points (bp) cuts are priced before the end of the year.

Tech Still Keeping Nasdaq and S&P Positive

US equity markets did not look at these at all. Instead, they rallied extremely strongly after NVIDIA released their earnings and forecast major growth in their chips sales on the back of AI applications.

The stock rallied close to 30%. Market capitalisation is not far off USD 1 trillion, and the price-to-earnings (P/E) ratio is at over 200. One has to a be a strong believer at such a P/E figure. It helped Nasdaq return over 3% and S&P stay positive on the week.

In the background, the debt ceiling discussions in the US kept markets on their toes, with every whisper on agreement between Democrats and Republicans sending equity markets up and vice-versa.

A very different picture in Europe, post German GDP and UK inflation, with a loss of 2% on average.

Fixed Income and Equity

The disconnect between fixed income and equity markets gets more acute every week (yields had gone up in Europe too). Historically, this has led to a reversal in equities. But every time it has happened, liquidity conditions were much worse than now.

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