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Markets and macro insights with Bernard Swords, Chief Investment Officer
Are equity markets continuing their positive momentum?
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A strong performance for equity markets last week, as world equities rose 1.4% in local currency terms. The euro area continued to perform positively, increasing by a further 3%. Results were driven by a sustained recovery for hardware and semiconductor industries within the Information Technology (IT) sector, as well as speculation regarding a settlement to the war in Ukraine.
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Equity markets showed a degree of concern over inflation at the start of the week, but this quickly subsided. The resilience of the US economy is sufficient for equity markets to continue strong, despite the reluctance of the US Federal Reserve to cut rates. Ending the war in Ukraine would be a boost for euro area markets, but uncertainty looms over Trump’s tariff policy toward Europe.
Is US inflation data a cause for concern?
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US inflation data had the biggest impact on markets this week. The Consumer Price Index (CPI) report was much stronger than expected. Core CPI jumped 0.45% month-on-month in January, the highest monthly increase since April 2023. The year-on-year rate rose to 3.2% and has been consistent since the middle of last year. The Producer Price Index (PPI) report did not indicate any relief to headline inflation, rising from 3.3% to 3.5%.
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The Federal Reserve closely monitors another inflation measure: Personal Consumption Expenditures (PCE). Given the recent figures of the CPI and PPI reports, economists expect the PCE to decline at the next release, thus offsetting some of the negative impact from the higher-than-expected CPI and PPI reports. Prices show a lower core PCE inflation rate, which is encouraging. However, the Federal Reserve will hold off on further rate cuts until there is clear proof of broader disinflation.
Are there any signs of growth in the euro area?
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The euro area industrial production report was very poor. Excluding Ireland, output dropped over 2% month-on-month. The performance of Germany was again particularly weak due to difficulties in the motor industry.
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The Purchasing Managers’ Index (PMI), a business sentiment survey, indicated some improvement, and there was hope of extra demand from the US ahead of tariffs being imposed. Unfortunately, this expectation has not been fulfilled, with the euro area manufacturing sector remaining in dire straits.
The week ahead: what to watch out for
Alongside more tariff talk, the main US business surveys (PMIs) will be reported. Euro area consumer confidence figures will also be available.
