Germany is returning to growth. The Fed has opted for the status quo.
Market sentiment eased somewhat when the Fed reassured that it was not going to raise rates, reminding that US growth remained strong and that there was no risk of stagflation. Likewise, employment figures supported the easing of bond yields as well as the rise in equities started on Thursday by J. Powell’s less aggressive than anticipated speech.
Thus the bond market caught its breath, the American 10-year fell to 4.50% and the German 10-year to 2.49%.
The fall in inflation and energy prices have enabled Germany to return to growth. Thus, German economic activity grew in the 1st quarter of 2024, by 0.2% after a decline over the whole of 2023.
The euro zone also emerged from its technical recession with GDP up 0.3% in the 1st quarter of 2024, after falling in the two previous quarters. Inflation in April stabilized at 2.4%, while adjusted for volatile elements, it continued to fall to 2.6% year-on-year, compared to 2.9% in March.
Manufacturing activity continued to contract for the 22nd consecutive month, the harmonized PMI index stood at 45.7. The sharp decline in new orders over the past 4 months reflects the weakness of demand in the euro zone. The European economy has been mired in stagnation for 1.5 years, which argues in favor of a rate cut by the ECB in June.
As for the United States, the Fed has opted to maintain its key rates, citing inflation that is more persistent than expected and a job market that is still too tight. It ruled out the possibility of a rate rise and announced that it would slow down the pace of reducing its balance sheet from June to ease pressure on bond yields.
The Fed remains dependent on data which leaves little room for prices to run out of steam. The manufacturing ISM fell into contraction territory, slightly below expectations, at 49.2, but with a very robust price component and contracting new orders. That of services also fell into the contraction zone at 49.4 with also a stronger price component than expected.
However, employment figures, released Friday, showed a job market that is starting to weaken. Thus the American economy created fewer jobs in April than expected, 175,000 versus 240,000 expected, while wage growth decelerated by 0.2% over the month. The unemployment rate rose to 3.9% in April. This slowdown in the American job market is seen as good news by the markets, because it takes pressure off the economy and is an argument in favor of lowering Fed rates.
The S&P500 rose +0.55% over the week, the Nasdaq +1.43%, while the Stoxx Europe 600 fell -0.48%.
The essentials in brief
