Market snapshot: inflation remains a core focus

A reading showing stubborn inflation in the US was enough to take the wind out of investors’ sails and arrest the recent surge in equity markets.

The consumer price index data from January showed a rise of 0.3% in January, or 3.1% annualised, which compared with expectations of 0.2% and 2.9% respectively, although the annualised figure showed a slight decline from 3.4% in December. Core prices, which exclude food and energy, rose by 0.4% on the month and 3.9% on the year, also above estimates of 0.3% and 3.7%. The figures heighten the previous concerns that the last leg of taming inflation could be the hardest and, by extension, that higher for longer inflation could vindicate the higher for longer interest rate backdrop which the Federal Reserve has been describing for some time.

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As such, with an interest rate cut in March now almost certainly off the table and with a May cut in doubt, the current consensus is leaning towards the first bout of monetary easing in June. At the same time, there is a growing realisation perhaps that the market’s previous pricing of six rate cuts for the year was overly optimistic, with the likelihood of just three cuts holding sway, especially in light of the Fed’s data-dependent strategy. The latest batch of economic readings has defied expectations of a slowdown, especially with regard to growth and employment, which lends further doubt as to whether rate cuts are even necessary at present.

Unsurprisingly, the inflation news hit growth stocks hardest, especially mega-technology stocks, with the likes of Microsoft Corp (NASDAQ:MSFT) and Amazon.com Inc (NASDAQ:AMZN) slipping by more than 2%. Bulls pointed to the fact that this setback simply provided an excuse to lock in some profits after the recent strong run, and that the general trajectory for inflation remains intact, while also highlighting that the current earnings season has for the most part been much healthier than expected.

Indeed, despite drops ranging from 1.3% to 1.8% for the main indices in a volatile session yesterday, the direction of travel remains positive. In the year to date, the Nasdaq remains ahead by 4.3%, the S&P 500 by 3.8% and the Dow Jones by 1.5%.

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Asian markets also felt the cold wind emanating from Wall Street, even taking some of the shine from the recent robust performance of the Nikkei index in Japan, which slipped by 0.7%. The Hang Seng index posted a modest gain following a recent holiday, while the mainland China market remains closed for the Lunar New Year holiday.

Inflation was also the focus in the UK, which showed a slightly different outcome to its US counterpart, sending markets higher at the open. Inflation remained at 4% in January, equalling December’s reading, and below estimates of a rise to 4.2%. Stripping out the likes of energy, food, tobacco and alcohol, the core inflation reading also remained flat, coming in again at 5.1%. The combined readings could be a precursor to a stabilising rate of inflation and have therefore been greeted positively, although the numbers remain above the Bank of England’s 2% target. Rate cuts are nonetheless expected later in the year, although there remains a fairly widespread difference in the timings of such easing, ranging from June to August.

The news prompted a relief rally in the beleaguered housebuilding sector, driven by gains in the likes of Persimmon (LSE:PSN), Taylor Wimpey (LSE:TW.) and Barratt Developments (LSE:BDEV). Coca-Cola HBC AG (LSE:CCH) surged after strong results, which mirrored the strength of its parent’s recently released numbers, while Rolls-Royce Holdings (LSE:RR.) gained after a broker upgrade. The opening strength of the premier index was largely mirrored in the FTSE 250 on the potentially improving inflation outlook, although the initial rise still leaves the index down by 3.6% so far this year. The FTSE 100 has yet to free itself of the shackles of insouciant investor interest and despite today’s initial gain remains down by 2.4% in the year to date.