Europe breaks records and Wall Street doubts due to inflation

Europe breaks records and Wall Street doubts due to inflation

The bull market recovered from the April vertigo attack and vigorously crossed the Atlantic. Europe’s stock marketsalways lagging behind Wall Street, always fearful of their destiny, They took the lead with determination. The Euro Stoxx 600 this time did not wait for anyone and set brand new records on its own. Will the S&P 500 follow in its footsteps? He does it. He has been on the rise for three consecutive weeks.

The FED is your friend (and the inspiring muse of all risk assets today). Her greatest awaits just a stone’s throw away. A 0.60% slap will be enough to overtake them, but on Friday he preferred not to attack them. Is it time for revenge? Are the romps over? If this were the case, the setback will have been halfway to the manual 10% correction. Europe attacks safely.

After Jay Powell’s words, he was convinced that he has no obstacles ahead of him. Wall Street, however, is wary of inflation, despite the FED’s nod of tolerance. On Wednesday you will receive the first reading of the trend in consumer prices for April. And a bad result could abort his offensive.

This week, no index rose more than the Utilities, public service companies (+3%), which is the unexpected segment that leads the counterattack after the crash. The Dow Jones (+2.1%) also rose more than the S&P500 (+1.8%) and the Nasdaq 100 (1.5%). It would seem that it is a conservative advance, with the parachutes at hand, in charge of sectors (and countries) that are not those that were at the top of the secular bull market, nor the most electrifying nor those that encourage the most suspicions of overvaluation. They are the ones who could defend themselves best if the news is not good.

Wall Street doubts about inflation. Reasons are not lacking. As Mary Daly of the San Francisco Federal Reserve acknowledges: “The last three months of inflation have left considerable uncertainty about the months ahead.”

Inflation, mother of all doubts

Inflation doubled. But the central bank did not change its score. He didn’t even cry out loud. The lowering of rates was repositioned on the waiting list. And the chances of a rate hike? That’s highly unlikely, Jay Powell said.. And, as if that were not enough, the reduction of its balance sheet – the QT plan – will proceed from June at a more gentle pace. In other words, an increase in long rates is not favored either, since they stopped climbing and fell a quarter of a point since the message.

This is how we understand the bonanza of Utilities, and of mature companies with predictable cash flows. Wall Street has hesitated since April, but has risen since Powell gave it tranquilizers. What does the FED know that we don’t? The jobs report created fewer jobs than expected.

Perhaps the economy will cool down and thus cancel out the rise in inflation. Without the need for official intervention. The jump in initial claims for unemployment benefits last week pointed in the same direction. The signals coming from service activity, idem.

Wall Street.JPG

Wall Street doubts about inflation. Reasons are not lacking.


However, the Atlanta FED’s real-time forecast insists on torrid GDP growth -+4.2%- in the current quarter. To make matters worse, consumer confidence cracked. Its one-year inflation expectation rose three tenths in April to 3.5%, the highest in six months.

The ten-year expectation also rose one tenth, to 3.1%. And so, to the constructive vision of the FED, a skeptical alternative emerged capable of denting its credibility. Does consumer distrust matter when, in fact, it is long-standing and yet they have never stopped spending lavishly? Does the consumer predict better than Powell and his colleagues? Not even close.

The problem is another. The FED can be tolerant of the data, and tame its interpretation. But you can’t let inflation expectations become unanchored (even if they’re wrong) and ruin your job. The FED also needs the April reading to corroborate – or at least not refute – its optimism.

Europe, in its well-deserved quarter of an hour in the sun

The long-suffering Europe, this time, has it easier. Inflation falls smoothly. The economy is resurgent after a mild recession. And if it were to overheat, unlike the US, much better.

A benign Powell is another timely incentive. Taking a rise in long rates out of the picture is very good for your risk assets. Removing the exchange rate pressure from the firm dollar will give more security to the ECB – and the Bank of England – to try its own pruning of short rates in June following the leading steps of Switzerland in March and, this week, Sweden. It is, one might say, their well-deserved quarter of an hour in the sun.

Source: Ambito

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