Navigating the Economic Maze - Inflation, Equities, and the Oil Conundrum

Last week, Europe saw high inflation data making headlines in countries like Spain, France, and Italy.

The United Kingdom saw average earnings significantly outpacing inflation at an impressive +8.5%. While this might sound like good news on the surface, it's a bit of a headache for the Bank of England's Monetary Policy Committee (MPC), as it adds complexity to their decision-making process: very high inflation at +7.8% and even higher earnings make an unlikely decrease in inflation: put simply, if inflation is high but wages match or surpass its level, consumers can afford to swallow higher prices, thus solidifying inflation expectations.

A Mixed Bag in the US

High inflation continues to linger, with the headline at 3.7% and the core at 4.3%. On the bright side, employment numbers are strong, showcasing the resilience of the American job market. These indicators should have painted a rosy picture for the US equity markets, but things turned out differently.

Surprising Market Moves

One might have expected solid performance from US equities and a weaker showing in European markets. However, the reality was quite different. US equity markets closed the week marginally down, while their European counterparts rallied. What's going on here?

Part of the explanation could be attributed to the European Central Bank (ECB), which raised the reference rate to an all-time high of 4%. But crucially, President Lagarde struck a more moderate tone at the ECB's Governing Council press conference. This moderation sparked optimism in the markets, with many hoping that the rate-hiking process in Europe may have reached its conclusion, potentially giving a boost to European equities.

Chinese Equities: A Tug of War

Over in China, it's been a bit of a rollercoaster for equities. On one hand, the nation’s largest real estate company, Country Garden, avoided a default on their foreign debt, providing some relief. On the other hand, government stimulus support has been less pronounced, and the People's Bank of China (PBOC) has been working diligently to stabilize the Renminbi, preventing further depreciation against the US Dollar.

The Oil Conundrum

As we noted a month ago, oil is the outlier. Both WTI and Brent crude have been inching closer to the $90 per barrel mark. This upward trajectory is starting to have a noticeable impact on inflation, not only in the United States but also in Europe. It's a situation that adds complexity to the central banks' battle against inflation, as they grapple with the consequences of soaring energy prices.