Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

Inflation a Core Focus

Published 14/02/2024, 08:31

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.

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 (NASDAQ:MSFT) and Amazon (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&P500 by 3.8% and the Dow Jones by 1.5%.

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 (LON:PSN), Taylor Wimpey (LON:TW) and Barratt Developments (LON:BDEV). Coca-Cola (NYSE:KO) surged after strong results which mirrored the strength of its parent’s recently released numbers, while Rolls-Royce (LON:RR) gained after a broker upgrade. The opening strength of the premier index was largely mirrored in the FTSE250 on the potentially improving inflation outlook, although the initial rise still leaves the index down by 3.6% so far this year. The FTSE100 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.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.