Market snapshot: inflation and rotation 

A benign inflation print failed to spark US markets into life last week as investors continued their search for performing assets elsewhere.

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The Consumer Price Index rose by 0.2% in January, 2.4% on an annualised basis and shy of expectations for gains of 0.3% and 2.5% respectively. Taken in tandem with the blockbuster non-farm payrolls report earlier in the week, which showed firm growth in the labour market, the numbers leave the Federal Reserve with additional room for manoeuvre in deciding when the interest rate cut becomes necessary. As such, a rally resulting from an easier monetary policy environment remains elusive.

Elsewhere, the corporate story continues to revolve around the AI trade, and not necessarily for the positive reasons to which investors have become accustomed. Disruption is the keyword as the debate rages over which sectors are likely to emerge victorious in the new world and, equally, those which are likely to fail. Quite apart from certain software companies which have moved into the eye of the storm, there has been weakness in other sectors which could feel a negative indirect impact, ranging from real estate to transportation, and from the media sector to financial services.

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With US markets closed today for Presidents’ Day, attention will turn to company updates later in the week. Walmart Inc (NASDAQ:WMT) will report annual numbers on Thursday, where sales will need to be at the top end of the expected range to continue to justify a punchy valuation rating which has seen the share price surge, propelling the group to become the first $1 trillion retailer. There will also be an update from Deere & Co (NYSE:DE), which should provide some colour within the space of agricultural equipment and construction machinery.

In the meantime, the weaker trading week had an impact on the performance of the main indices. The more traditional Dow Jones has added 3% in the year so far, whereas the more tech-focused S&P500 and Nasdaq have borne the dual brunt of rotation and AI concerns with losses of 0.1% and 3% respectively.

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Trading was also thin in Asia with some markets closed ahead of the Lunar New Year, such as China, Taiwan and South Korea. The Nikkei 225 lost some ground as economic growth came in lower than expected in the latest quarter, with an annualised number of 0.2% far short of the expected 1.6%, prompting questions on whether aggressive fiscal stimulus may follow from the new regime. Despite government spending and the effect of tariffs on imports moving in the wrong direction, investors have been undeterred and the primary Japanese index has risen by 10% in the year to date, setting new record highs along the way.

Meanwhile, the global investor search for alternatives to US markets and some bloated valuations continued to wash onto UK shores, where the main indices nudged into positive territory at the open. 

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For the FTSE100, the gains were led by some of the stocks which had been under pressure last week, such as data providers and the banks, both of which were caught up in the AI disruption debate. There was some tentative buying in the likes of Experian (LSE:EXPN), Sage Group (The) (LSE:SGE) and the London Stock Exchange Group (LSE:LSEG) and rather more conviction in the banks as NatWest Group (LSE:NWG), Barclays (LSE:BARC) and Standard Chartered (LSE:STAN) towards the top of the leaderboard with gains of up to 3.5%.

The incremental gains build on the strength of the domestic indices in the year so far, with the FTSE100 having risen by 5.3% and again threatening a new record high, while the FTSE250 has added 4.5% as the global interest in the stability of established and mature companies continues to be of investment interest and indeed demand.