Sticky US inflation changes the game as markets reassess rate cuts narrative

“It’s hard for investors to hang onto their sunny disposition when inflation keeps raining off the planned rate cut parade,” says Danni Hewson, Head of Financial Analysis at AJ Bell.

“The latest US consumer prices data came in hotter than expected at 3.5%, giving plenty for the Atlanta Fed’s sticky index to pore over. That stickiness sent market sentiment tumbling as it casts further doubt on what had been a well charted path to a pivot for the Federal Reserve.

“Where once investors had seen at least three rate cuts this year with May’s meeting looking like a real contender for when the switch would be flipped, there’s now a real sense the can is being kicked further and further into grass that keeps on growing. No surprise then that US markets tumbled on the news as even the most bullish investors are forced to take stock.

“London’s blue-chip index, which had looked to be heading towards record territory, was jolted back from the brink. Tesco helped fan the flames more than a little in early trading thanks to a pretty stonking update which demonstrated how strategy and size can work together in perfect harmony. Its success provided a slipstream for consumer giants like Reckitt Benckiser and Tate & Lyle along with rival Sainsbury’s and retail behemoth Next. There was also a continued run of good form for BP as the oil price hovered around the $90 a barrel mark.

“But domestic successes couldn’t quite hold back the tide of uncertainty that today’s US CPI figure has unleashed. The expectation had been that the strength of the US economy, coupled with what seemed to be an early win over high prices, had set the expectation that the Fed would move first.

“Now, though a soft landing isn’t out of the question, Goldilocks isn’t finding today’s temperature to her liking on the other side of the Atlantic. But things are different in the UK and Europe and central banks here will be plotting their own paths. On the way up the Bank of England jumped first and the question is whether the same could be needed on the way back down.”

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