Inflation Surprises in Europe and Japan

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.

Summary

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.