Markets on the back foot as inflation concerns overshadow Nvidia success

• European markets follow US counterparts lower after concerning US PMI spike
• UK retail sales contract, easing inflation worries
• US core durable goods orders data in view

European markets are in the red this morning, with markets attempting to claw back lost ground after a sharp decline over the course of the US session. Even a helping hand from Nvidia failed to stem the declines seen yesterday, with the 1.5% Dow decline highlighting the dour sentiment seen throughout markets when you strip out the effects of a 9% gain for the chip giant. Nvidia found itself as a lone oasis in a sea of red, with the rest of the Mag7 stocks following the wider trend lower. With earnings season largely behind us, we will now see markets following the economic data more closely, and unfortunately, we look set for a protracted period of high rates if recent inflation data is anything to go by. Yesterday’s US PMI survey saw a sharp rise across both manufacturing and services, highlighting continued strength that pours cold water on disinflationary hopes with a sharp surge in services sector activity pushing overall business activity to a two-year high. Unfortunately, the underlying price pressures seen within both manufacturing and services sector activity pushed higher yet, highlighting the fact that the final push back down to the Fed’s 2% will likely remain elusive for some time yet.

UK retail sales data released this morning helped ease recent inflation concerns, following on from a slump in the services sector PMI survey yesterday. With UK inflation solely being driven by the services sector, the sharp decline seen for the services PMI helped boost hopes that the recent uptick in price pressures will abate in the months ahead. Meanwhile, today’s -2.3% retail sales slump helped further bolster claims that UK shoppers are curtailing purchases in the face of elevated prices, with shoppers increasingly unwilling to pay more for less. Part of this weakness has been attributed to weather-related factors, with clothing, footwear, household goods, and other non-food stores seeing circa 5% declines over the course of April. Whether those purchases will pick up in May remains to be seen, with the Bank of England likely to hope for continued softness given the impact such demand destruction can have upon pricing.

Looking ahead, all eyes turn to the release of the latest US core durable goods data, with markets hoping for weakness given the ‘good news is bad news’ construct highlighted by yesterday’s PMI release. With the FOMC minutes highlighting a mixed range of views that included the potential to hike rates further, any pop in the core durable goods orders figure could further drive risk-off sentiment given the implications for monetary policy.