A whistle stop tour of last week and what to expect in the coming days

Starting with the facts, US equities, in particular, had a poor week. The US headline CPI print provided further evidence of the Fed’s concern that prices are still rising at a faster rate than they like, and as a result, they continue to defer the timing of cutting interest rates. The minutes of the last Fed meeting still indicated the Fed still expects to ease monetary policy at some point this year. Corporate earnings season has started; JP Morgan, Citi and Wells Fargo all released numbers on Friday. At the headline level, pretty much as the market expected, but slightly gloomy outlook statements and concerns that Net Interest Income margins may be peaking put pressure on share prices. Then, over the weekend, Iran’s drone attack on Israel runs the risk of escalating the tensions in the region. Commodity prices rose; oil, copper, Gold, and the US dollar as safe haven assets were in demand. US treasury yields finished the week higher as market speculators once again reduced the odds of a June cut in US interest rates. Geopolitics, macro data and corporate news all influencing investor sentiment in the past week.

When it comes to geopolitics, it’s mainly about the impact an increase in geopolitical tensions in the region has on the oil price. Higher oil prices tax consumption and stunt growth, but they do not allow easier monetary policy to compensate for this, as they have their own inflationary implications. Equity markets on Monday look to be opening on a positive note despite the weekend events, as the price of black gold has drifted lower in overnight trading. One would imagine the weekend has given diplomats time to work to ease tensions. Saudi officials calling for the “highest levels of restraint”.  

The week ahead has plenty of macro events across markets. Early in the week, US retail sales will be followed later in the week by industrial production and the initial claims jobs report. Back to the old question, will bad economic data help improve interest rate sentiment and, therefore, markets, or vice versa?

Last week’s ECB meeting and the release of the latest euro area inflation data continued to indicate that the inflation picture in the euro area looks more optimistic than that of the US. German inflation eased to 2.2% from 2.5% in the previous month. As the economy does show signs of stabilising, the ECB remains on target to cut rates in June, clearly stating to act independently of what the Fed decides in June. A further rise in the monthly ZEW economic survey should reinforce the view of the improving outlook for the euro area this week.

As for the UK, last week’s GDP report continues to suggest a further rebound in the economy. Economists are now forecasting 0.3% GDP growth for the second quarter, which is hardly thrilling but an improvement from the gloomy predictions of a few months ago. Bernanke’s report highlighting shortcomings in forecasting models came as no surprise. This week, we get labour data as the unemployment rate is expected to remain at 3.9%. On Tuesday, we get the latest consumer prices; another fall is predicted to be 3.1%. On Friday, retail sales are expected to rise month on month.

This week, the corporate earnings season starts getting hot and heavy, with names such as Goldman Sachs, Johnson and Johnson, United Airlines, and ASML, to name a few.