No major movements were seen in the markets in one direction or the other. Last week’s most interesting events were the data disclosures essential for the Fed and the eagerly anticipated Q1 earnings reports from the US banking sector.
In the investment markets, last week was quite calm. No major movements were seen in the equity markets, but the market experienced cautiously positive development. The interest rate level inched its way slightly higher, which had a negative impact on government bond returns. The dollar has recently depreciated against the euro and the currency pair closed the week at an exchange rate of 1.10.
Last week saw data disclosures that were essential for the direction of US economic development and more specifically inflation, and thus the Fed’s monetary policy.
According to the data published last week, US inflation moderated in March somewhat more than expected, to +5.0 per cent, while headline inflation was +6.0 per cent in February. The impact of energy prices on inflation was negative, which means they contributed to slowing inflation. In contrast, core inflation, i.e. inflation less energy and food prices, accelerated somewhat to +5.6 per cent (+5.5 per cent in February). Core inflation, which the central banks traditionally keep a closer eye on, seems persistent, maintaining expectations of yet another, i.e. a 0.25-percentage-point hike in the key interest rate. That said, the markets are still expecting interest rates in the USA to take a turn downward at the end of this year.
According to the survey conducted by the University of Michigan, consumer expectations for next year’s average inflation increased substantially, to +4.6 per cent (previously +3.6 per cent). Long-term inflation expectations remained unchanged, however. Consumers’ inflation expectations have previously remained relatively low compared to actual inflation. What is interesting is why consumers have begun to expect higher inflation now that actual inflation has been slowing for a while. One possible explanation is that the middle classes are starting to increasingly feel the impact of rising prices on their everyday lives.
Last week we also obtained US retail sales data. In March, retail sales contracted less than expected compared to the previous year. Retail sales, excluding cars and petrol, contracted -0.3 per cent against the expected -0.6 per cent. The publication of the figures was followed by a slight rise in the interest rate level, as development was more positive than feared and reinforced expectations of a key interest rate hike in the central bank’s May meeting.
Better-than-expected earnings from the banking sector
The Q1 earnings season kicked off in the USA at the end of the week with earnings disclosures from the banking sector. Citigroup, J.P. Morgan and Wells Fargo reported earnings that exceeded expectations. The earnings were a relief, as they support the concept that the challenges faced by US banks were limited to small banks. The plight of smaller banks can even support the business of their larger peers, because the deposits that are now being withdrawn from smaller banks are transferred to large banks, in addition to money market funds. J.P. Morgan, for example, reported strong inflows of deposits.
The earnings season is kicking off in earnest during this week. Overall, earnings are expected to have contracted in the first quarter of the year. The energy sector, which used to largely impact earnings growth in the markets as a whole, has seen its influence diminish.
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