Mixed Bag on the Growth Front

Last week saw the ongoing industrial recovery out of China, with very strong production numbers; giving hope to the global economy.

The same numbers out of the US, though, showed a deceleration. Services in the US are still doing well, however. That side of the economy is still expanding, as per data released on Friday. Inflation numbers in France, Spain, Italy and Germany were bad. It looks like this position is becoming entrenched.

It is a mixed bag on the growth front; and a worry, with inflation staying high, as indicated by Europe data releases last week and by the US in the last two weeks.

Fixed Income Markets

Fixed income markets reacted to inflation numbers: German Bund (German government bonds) yields shot up to their highest in 10 years. Bunds being the reference for bond markets in Europe, all other securities followed suit.

In the US, too, last week saw a major sell-off of fixed income securities. Especially for longer-dated ones such as 10y and 30y. US Treasuries broke the 4% yield barrier on Thursday.

Equity Markets

Equity markets rebounded after the previous week’s losses; with a good 1.5% gain in the US and 1% in Europe. It felt like the bargain hunters were there to snap better entry levels. It seems the 4% gain on the Chinese stock market may have given a boost to markets elsewhere.

There is a disconnect between equity markets (seeing a soft landing or no landing at all), fixed income markets (pricing higher yields) and restrictive monetary policy by central banks. Restrictive monetary policy usually leads to slowdowns or recessions. That stance was validated over the weekend by Fed Governor Mary Daly and ECB President Christine Lagarde. Both reiterated the need to have higher rates for longer to stamp out inflation expectations.

The current price action is likely to continue a while till there is certainty of inflation path.