Market snapshot: inflation surprise dashes rate cut hopes

Inflation is refusing to lie down, which has forced investors to relinquish any lingering expectations of an imminent interest rate cut from the Federal Reserve.

The main US indices came under renewed selling pressure following the latest release of the Consumer Price Index (CPI), as well as some comments from the latest Fed minutes implying that the battle against inflation has some way to go, lessening the pressure for cuts.

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The CPI reading rose by 0.4% for the month and 3.5% year on year, as compared to estimates of 0.3% and 3.4% respectively, with core CPI (excluding food and energy) showing hikes of 0.4% and 3.8%, compared to expectations of 0.3% and 3.7%. The apparent stalling of disinflation has also effectively taken the possibility of a June rate cut off the table.

Indeed, at one stage the consensus was that the Fed would be the first to cut interest rates ahead of the European Central Bank (ECB) and the Bank of England. It is now increasingly possible that it could be the last, with cuts from both the ECB (although not at today’s meeting) and the Bank of England expected before September, when the Fed is now expected to move. There is also an emerging, albeit minority view that there may be no rate cuts at all this year given the strength of the underlying economic data.

Further inflationary pressure also came in the form of another jump in the oil price, which has now risen by 17.5% this year, as a report was released suggesting that there could be an imminent strike on Israel from Iran or one of its allies.

As such, interest rate sensitive sectors such as real estate were the hardest hit in US trading, while Treasury yields spike again. Focus now switches to today’s data on producer prices which will give further clues on inflation, and the first-quarter earnings season which quietly kicked off yesterday with better-than-expected numbers from Delta Airlines, with a number of key bank releases tomorrow.

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April has proved a difficult start to the quarter for the main indices, although the brisk beginning to the year has ensured they each remain in positive territory. In the year to date, the benchmark S&P500 is up by 8.2% and the Nasdaq by 7.7%, with the Dow Jones bringing up the rear with a more pedestrian gain of 2%.

Asian markets tracked Wall Street lower, with the Japanese yen under pressure once more on the back of dollar strength. The Chinese economy is also back in a focus, with the country’s outlook having been downgraded to negative from stable earlier in the week by a ratings agency, and with the latest data showing that work needs to be done. Chinese shares eked out marginal gains on a low inflation number, but tepid domestic demand remains one of the factors which continue to require attention.

In the UK, the FTSE100 bucked the trend at the open, despite the technical drag of a host of companies being marked ex-dividend, including some heavy hitters such as Aviva (LSE:AV.) and Lloyds Banking Group (LSE:LLOY), as well as the likes of Phoenix Group Holdings (LSE:PHNX) and Barratt Developments (LSE:BDEV).

In a separate announcement, AstraZeneca (LSE:AZN) declared an increase of 7% to its full-year payout as part of its progressive dividend policy, sending its shares higher. There was also some positive pressure for the index following broker upgrades to Kingfisher (LSE:KGF), Marks & Spencer Group (LSE:MKS) and Smiths Group (LSE:SMIN).

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As such, the premier index managed a marginal gain which leaves it ahead by 3.1% so far this year, interestingly overtaking the Dow Jones index in the process on a simple return basis.

Any sustained strength from here could well test the record closing high set last February of 8,014, with factors such as the oil price which has been to the detriment of inflationary sentiment elsewhere actually boosting the oil majors, which are both extremely large components of the index.