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The US economy remains strong, inflation high. This is dampening hopes of rapidly falling interest rates in the United States, with the European Central Bank possibly making its first interest rate move before the Fed. “The risk of price setbacks is growing for investors,” says Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. The extent of the risk will initially depend primarily on the start of the reporting season.

In Europe, inflation is easing: in December 2023, the inflation rate was still at 3.4 percent and, according to preliminary figures, fell to 2.2 percent in March – steadily towards the ECB’s target of just under two percent. The situation is currently very different in the USA: The US economy shows no signs of slowing down, job creation has recently far exceeded expectations at 303,000 and wage growth remains strong. Accordingly, inflation remains at a high level, with the rate even rising from 3.2% to 3.5% in March. The core rate – excluding food and energy prices – remained at 3.8 percent. “This means that hopes of an imminent easing of monetary policy in the USA are fading,” explains Gerlinger. In the meantime, only two interest rate cuts are expected this year. Former US Treasury Secretary Larry Summers even sees the risk that the next move by the US Fed could be an interest rate hike.

On the one hand, this is unfavourable news, as lower interest rates would support the US economy and the ailing commercial real estate market. “If interest rates remain high,” says Gerlinger, “this could have a negative impact on the previously positive outlook for stronger growth in the US economy.”

On the other hand, the US economy has proven in recent months that it can grow strongly even with higher interest rates. Gerlinger’s conclusion: “Nevertheless, the risk of a setback is growing for the US equity markets, even if the scepticism and fear of this should limit the price risk. The direction the market takes in the short term will also be determined by corporate balance sheets. The focus is therefore on the reporting season for the first quarter.”

At their most recent meeting, the ECB directors held out the prospect of an interest rate cut in June. “This increases the likelihood that Europe’s central bank will emancipate itself from its US sister and cut interest rates before the Fed,” says Gerlinger. This is likely to put further pressure on the euro-dollar exchange rate, with the parity test then imminent.