A Positive Sign for Investors

Last week saw a strong performance for equity markets, with the US markets up 3% and European markets up almost 5%. This is welcome news for investors who have been grappling with market volatility over the past few months.

The added liquidity and reassuring words from the Federal Reserve and Treasury helped to calm fears about the recent failures of some banks. This has given investors a renewed sense of confidence in the markets.

Marginal Change Spreads Positive Sentiments

One factor that has contributed to the market's strength is lower inflation numbers in both the US and Europe. While the levels are still high, the lower marginal change was viewed as a positive sign by market participants. In Europe, this was largely due to less price pressure on energy supply. In the US, it was more widespread across categories.

However, food inflation in the US and Europe continues to rise, which may have an impact on consumers.

Inflation Expectations Still Need to be Managed

The Federal Reserve is in a tricky position when it comes to managing inflation. On one hand, they need to support the economy and ensure that the labor market remains strong. On the other hand, they need to manage inflation expectations and prevent prices from spiraling out of control.

The risk for the Federal Reserve is that a rallying US equity market, added liquidity, and lower Treasury yields may contribute to looser financial conditions. This could prevent inflation from coming as quickly as expected in a strong labor market.