Higher US inflation dampens the market mood

Key takeaways

The week played host to significant economic updates in the all-important US economy, setting the scene for uneasy financial market performance.

• The latest US inflation news showed that pricing pressures are unexpectedly high in the world’s most influential economy. The Consumer Price Index (or CPI) rose to 3.2% in February versus 3.1% in January. ‘Core’ CPI, which strips out food and energy costs, rose to 3.8%. The cost of shelter (i.e. rental costs, or equivalent costs for homeowners) was among the main culprits pushing prices higher. This data was echoed by the latest reading for prices paid by US manufacturers (the Producer Price Index, or PPI), which also rose by more than anticipated in February.
• While we maintain our house view that the journey away from high inflation was never likely to be a straight downwards line, two consecutive months of higher-than-expected inflation does present a challenge for the US central bank (the Federal Reserve, or ‘Fed’). The Fed has used interest rate hikes as its primary tool in the war on inflation in recent years. Market pricing at the end of 2023 indicated that investors previously expected the Fed to cut rates five or six times, but this has now been reduced to just three times – more in line with the Fed’s own expectations. Leading policymakers at the Fed will meet this week, and will also have the latest employment market data to consider (covered in last week’s Weekly Bulletin) as they make their next interest rate decision.
• Against this backdrop, financial markets had an uneasy week. The US stock market (gauged by the S&P 500 Index) fell for the second week running – the first time this has happened in 2024. Meanwhile, bond markets were nervous too. The market value of bonds is extremely sensitive to the potential for changes in interest rates, so the suggestion that stubbornly elevated inflation could alter plans for rate cuts later this year was enough to create an uneasy week for bond investors.

Weekly market moves

• News of higher US inflation created a challenging week for bond markets, as investors assessed the likelihood that this would affect future interest rate decisions.

• Stock markets had a mixed week. For UK-based investors, weakness in sterling cushioned returns from overseas assets, due to the benign effects of moving from stronger overseas currencies into a weaker pound.

What to look out for this week

• Given the balance of economic news in play, the US central bank is expected to hold interest rates steady at its policy meeting on Wednesday.

• On home shores, UK inflation data will also be released on Wednesday, and the latest Bank of England decision on interest rates will be announced the following day.