Commentary:

US PCE inflation, Fed’s preferred inflation measure, continued to decline in January with headline figure reaching 2.4% and core falling to 2.8% (both figures in line with consensus analyst forecasts). The news had a positive impact on markets, especially after a higher than expected CPI figure (traditional inflation measure) released earlier in February. In fixed income markets, yields declined, especially on shorter-term securities (2-year US Treasury now offers 4.55% yield vs 4.69% a week ago). Meanwhile, a market-wide rally was observed in equities, with small-caps being the best performers. Moreover, the rally was less concentrated in large caps, with equal-weighted S&P 500 slightly outperforming its market-cap weighted peer.

In contrast, preliminary February inflation came in higher than expected in Eurozone (core CPI declined to 3.1% vs 2.9% forecast). As a result, European equities remained largely stagnant last week. Importantly, on Thursday this week ECB will make an interest rate decision, which will factor in the latest inflation print.