Inflation data should be treated with caution

• European markets lag after strong US session.

• Inflation data should be treated with caution.

• Weak retail sales figure brings further questions for US economy.

European markets have failed to follow the bullish theme set in the US, after all three main US indices hit record highs in the wake of a lower-than-expected inflation reading. The FTSE 100 in particular has been hindered by the heavy weighting of energy stocks this morning, with sharp declines for both Shell and BP coming off the back of an oil price decline that saw WTI fall into a two-month low yesterday. Thankfully, that weakness in the energy space does bode well for inflation, helping to drive down expectations after a concerning first few months of 2024. Notably, after a two-month period of FTSE outperformance, May has started to see that pattern reverse as US markets start to regain their foothold as the go to place for investors.

While US markets may have pushed into record highs, yesterday’s inflation data did little to encourage the view that above-target inflation is going away. Headline CPI remains in the mud, stuck above 3% for 37 consecutive months now. With markets pricing a whopping 75% chance of a September rate cut, that decision looks likely to take place against a backdrop of a CPI figure that is not too far removed from the current 3.4% announced yesterday. With market pricing looking out of kilter with reality, the weakness we have seen the in dollar looks likely to reverse if we see the Fed push back against those September rate cut expectations over the coming months.

Part of the optimism seen throughout US markets came as a result of a weaker retail sales figure, which fell back down to 0% in April. This is just the latest in a long line of concerning economic data points released over the course of this month. Between a three-year low in job openings, an uptick in unemployment, and a six-month low in non-farm payrolls, markets will hope that these tentative signs of economic weakness could force the Fed’s hand. With jobless claims having spiked into a six-month high last week, all eyes will be on this key metric as we seek to gauge whether that was an outlier or indicative of something more troublesome. Once again, it is likely that markets will look at this unemployment claims figure through the ‘bad news is good news’ prism, with any further weakness likely to strengthen the case for a September cut from the Fed.