Market snapshot: inflation data in focus as sentiment weakens

US investors have run into a brick wall over recent days, with the validity of the drives to fresh record highs having been brought into question.

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There have undoubtedly been signs of weakness in the labour market which have led to expectations of further interest rate cuts being ratcheted up. However, the latest jobless claims number was solid in that the decline was more than expected. In addition, GDP growth was revised up to 3.8% from a previous 3.3% for the second quarter, with consumer spending and business investment providing a strong base.

This show of economic strength could in turn lower the need for further cuts from the Federal Reserve, which would remove a major plank of the bull case. Sentiment was also hampered by the White House announcing a new raft of tariff measures which, all things being equal, will be inflationary and to the detriment of consumers as prices rise.

As such, the release of the Personal Consumption Expenditures index later, the Fed’s preferred measure of inflation, will take on added significance. A rise of 0.3% for August is expected, annualised to 2.7%, and any upward surprises will equate to downward pressure on share prices as the likelihood of cuts lessens.

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As ever, the bond market recognised the potential shift and, with yields rising again, growth stocks within the tech sector in particular suffered a hit. There is also an element of discomfort being felt in valuations, most notably as to whether the recent euphoria over the AI trade as highlighted by the Oracle Corp (NYSE:ORCL) tie-up earlier in the week has been overstated.

Meanwhile after a few days of minor losses the main indices nonetheless remain ahead for the year, and not far from their recent record highs despite the dip. In the year to date, the Dow Jones has added 8%, with the more tech-focused S&P500 and Nasdaq having spiked by 12.3% and 15.9% respectively.

The element of caution washed through to Asian exchanges overnight, which enabled the London market to reassert itself as a haven destination for investors. The FTSE100 edged slightly higher to extend its gain so far this year to 12.9%, quite apart from the additional attraction of stable and relatively generous dividend yields, which currently average 3.3% across the primary index.

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Banks found some new friends as the likelihood of interest rate cuts lessened, while Babcock International Group (LSE:BAB) reversed some of its losses following yesterday’s trading statement. There was some inevitable weakness in GSK (LSE:GSK) and AstraZeneca (LSE:AZN) given the US President’s latest volley against the pharmaceutical sector, while a brief relief rally in the oil price pushed BP (LSE:BP.) and Shell (LSE:SHEL) higher to consolidate this year’s gains.