Short but Promising Week

Last week was a short one, since Easter Monday was a holiday in many countries. So the low volume of data released is no surprise. One of the two key releases was retail sales data in the US and Europe – slightly weak in both markets.

The other was inflation. HICP in Europe was higher than expected. In the US, it was as per forecasts, but showed a very moderate deceleration at headline level.

Relief for Equity Markets

Equity markets reacted very well to these, with a gain of around 1% in the US and almost 2% in Europe. The French CAC index is at all time highs, driven by Total (due to higher oil prices) and LVMH (due to very strong sales out of China).

Bank earnings in the US were much better than they were feared to do lately, especially after the recent bankruptcies of the three regional banks. This upbeat performance gave some relief to equities.

US Inflation Remains Above Target

Christopher Waller, a Fed governor and one of the FOMC voters this year, said on Friday that the Fed should keep rates high for some time. The issue facing the US central bank is core inflation (ex-food and energy). It is not moving down; and remains at 5.6%, way higher than the 2% target.

Oil prices are moving back up, too, and it is happening before what is traditionally the “driving season” – when Americans take their cars to go on holidays or visit family over the summer. The driving season invariably sees higher prices at the petrol pump, as demand is given a boost.

Many Americans have to use their car to go from point A to point B. Therefore, the price of “gas“ at the petrol pump has a real impact on household finances. Higher prices will mean higher inflation again.

Waller was probably trying to warn market participants that the Fed would keep steady and not cut rates from the end of this year, as per market prognosis.