ECB surprises with interest rate decision: What effect does inflation have?

ECB surprises with interest rate decision: What effect does inflation have?

With the higher than expected inflation data in the USA and the ECB's interest rate decision, the current stock market week was not exactly uneventful. For a long time it was a given that the American Federal Reserve would cut interest rates several times this year and that the European Central Bank would follow suit. Now it looks as if the ECB will go first. An interesting turnaround in installments: At the beginning of the year, the Fed was still expecting 5 to 7 interest rate cuts. Their number was constantly shrinking, the beginning slipped further and further back - so now the situation is reversed. So much for predictions.

The trend in inflation seems to give the ECB more leeway. Mind you seems. Services inflation, which is the best way to see the impact of higher wages on prices, remains high at 4 percent and is not that much lower than that in the United States. Even if analysts point to less tension in the labor market, the wage price spiral is not off the table.

Stock prices have been consolidating for a long time. Since the S&P 500's record high on March 28, it has fallen by 2.5 percent, as have the Euro Stoxx 50 and the F.A.Z. index. On Friday, the worsening of the situation in the Middle East caused significant price losses, especially on Wall Street.

But the price weakness otherwise has to do with inflation and interest rates. It will now be interesting to see whether the ECB will cut interest rates four times this year, as many expected. Nothing came of the Fed's 5 to 7 either.

It's not that simple, warns Allianz chief economist Ludovic Subran. If the Fed doesn't follow suit, the markets could overreact. He didn't want to talk about capital flight, Subran said in a Bloomberg interview. But different approaches from central banks would be difficult for Europe to digest. Even an interest rate cut of half a percentage point would be courageous in view of the euro exchange rate, not least because of the oil price.

But Wall Street is already looking elsewhere. The reporting season began in the USA on Friday. Further profit growth is expected for the companies in the S&P 500. Corporate profits are much stronger than many had assumed.

Well, it has a little to do with higher prices. But with a price-earnings ratio of 21 and therefore a stock return of 4.8 percent, the market does not look so attractive with a ten-year government bond yield of 4.5 percent. It's the lowest valuation margin for stocks in two decades. If interest rates don't fall, stocks won't become more attractive.