Despite the short week, the start of May was ridden with market movers that will define the future of our economies.
The first week of May, a short week in many countries because of the International Labor Day on Monday, was a disaster for the markets. The American Federal Reserve decided to raise interest rates once again by another 25 basis points.
On the other hand, while the Fed signaled a period of rate stabilization in the short term, the ECB does not seem willing to stop hikes.
Here’s a few numbers to round up the week:
- Predictably, the S&P 500 and the Nasdaq both severely underperformed. The S&P 500 fell by -1.66% and the Nasdaq did by -1.25%.
- The Dow too had a terrible week ending with -1.98%.
- In Europe, markets were slightly more stable with Milan ending at +0.032% and Frankfurt at -0.12%.
- London, however, was the worst European index of the week ending with -1.17%.
The Fed and the ECB diverge
On Wednesday evening, the American Fed released its statement, increasing interest rates but signaling it would have been the last time.
Indeed, US inflation seems to be slowly coming down, with a -1% month-on-month in March. For the first time, core inflation was higher than general inflation, underlining the housing market bubble.
In Europe, however, inflation is sadly still extremely high. In fact, inflation is expected to rise in April to 7%. In March, EU inflation was down to 6.9%.
This inflationary crisis led the ECB to diverge from the Fed. In the opinion of ECB president Christine Lagarde, inflation is way too rampant to talk about stopping rate hikes. This week, like the Fed, the ECB too raised rates by 25 basis points.
Luckily for Europe, its GDP growth has been higher than the US. Both in the Eurozone and the Union as a whole, yearly GDP grew by 1.3%, while the American economy did worse than expected and grew only by 1.1%.
A looming banking crisis
Furthermore, the American Fed has another reason to stop interest rate hikes. The American banking system is severely ill, despite reassurance of the opposite by the government and the Fed itself.
Last weekend, the collapse of First Republic marked the second largest banking failure in US history, only overshadowed by that of Washington Mutual in 2007. Following the Fed’s announcement on Wednesday, Pacwest on Thursday and Western Alliance on Friday both showed signs of impending failure.
In Europe, the banking system seems to be more stable, at least for the moment. After the two crises of Deutsche Bank and Credit Suisse were averted, the European banks truly seem to be safe.
