Market snapshot: inflation number spooks UK stocks

Investors focused firmly on latest corporate results out of the US have been distracted by worse-than-expected inflation data out of the UK. Our head of markets discusses the impact. 

Markets traded flat as the reporting season gathered pace with mixed results, and with recessionary concerns remaining close to the surface.

Most of the US banks have now reported first-quarter earnings and have passed the stress test. The recent banking turmoil had threatened to feed fears of a systemic issue, but swift intervention by the authorities and the strength of the largest banks appears to have contained any crisis. There remain some concerns on a regional bank basis, but one of the themes has been some transfer of deposits to the safety net of the larger institutions by customers.

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The banks have inevitably seen a rise in interest income given the latest round of rate hikes, while the likes of Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co (NYSE:JPM) assuaged any immediate concerns on a potentially slowing economy. The Goldman Sachs Group Inc (NYSE:GS) shares dipped after reporting a largely expected drop in dealmaking and bond trading, while elsewhere Johnson & Johnson (NYSE:JNJ) shares fell following a downbeat assessment of lingering inflationary costs.

The reporting season is still in its infancy but on the whole has exceeded expectations so far, albeit against an extremely low level of expectations. Stronger tests may yet come as investors await more retail-related updates in order to gauge whether the vitally important consumer is starting to show signs of fatigue against an inflationary backdrop, coupled with the possibility of tighter lending conditions.

At this point, investor attention switches as the corporate and economic outlook merge. For companies, there are currently few signs of a deterioration in trading, while for the economy a further rate hike is expected from the Federal Reserve in May.

As such, the likelihood of a recession increases further, and over the coming months the effects of the hikes so far will become increasingly apparent. In light of the challenges to come, the main indices have gas in the tank with the Dow Jones having risen by 2.5%, the S&P500 8% and the Nasdaq 16% in the year to date.

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Asian markets also drifted, with China at the core of investor attention. Despite the most recent jump in economic growth which surpassed expectations, doubts remain as to whether this was simply a bounce following the economic reopening. General household consumption remains a concern, youth unemployment is still relatively high and external demand is showing signs of weakness, all of which could mitigate some of the progress which the economy is making. 

Inflation was the early highlight in UK markets, which drifted lower as the persistence of higher prices remained intact. The headline figure fell to 10.1% in March from 10.4% in February, but remained above the expected decline to 9.8%. This will likely put pressure on the Bank of England to almost reluctantly continue with its interest rate hiking policy in May. That adds further pressure to an already beleaguered consumer where wage growth is being outstripped by inflation and with economic growth stalling. The release was not well received by the FTSE250, something of a barometer for the UK economy, which dipped to reduce its gains in the year to date to just 1.7%.

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The premier index also declined, with a broad markdown of the more cyclical and risk-on sectors, such as the miners and the housebuilders. Notable gains were few and far between, although the banks showed some resilience following the generally positive read across from their US counterparts so far.

The FTSE100 nonetheless remains ahead by 5.8% so far this year, although more immediate prospects will likely be driven by prospects for both the US and UK economies as they battle to contain the impacts of any potential recessions.