US equity slump hurts European sentiment as inflation risks cause markets jitters

• Equities weaken as Red Sea risks raise inflation concerns
• GBP remains volatile after CPI report sets UK on track to return back to target
• US markets look ahead to GDP data release, with markets concerned over the 2024 Fed Funds pathway

European markets are in the red, following on from a US session that saw equities losing traction as the prospect of a year-end Santa Rally starts to dim. We have seen a pick-up in energy prices over the course of recent weeks, with the Red Sea attacks raising inflation concerns after US gasoline prices posted the biggest one-day increase in four months. While the US plans to engage a military taskforce into the region, there are growing concerns that any failure would cause huge global disruptions to the supply chain for as long as the Israel-Gaza conflict continues. With WTI rising to the highest level in over two weeks yesterday, there are growing concerns that we could see inflation rear its head once again if the Suez Canal shipping route remains out of action.

The pound continues to suffer, with the UK inflation report helping to bring forward expectations over the Bank of England easing next year. While nine of the past 18-months saw UK inflation in double digits, yesterday’s November inflation report has finally seen markets believe in the ability to swiftly return to the 2%, which looks likely within the next six-months. As such, it seems likely that the Bank of England will soon start to shift their focus towards the risk of an overshoot, with a move back down towards 1% a distinct possibility by the end of H1 2024.

US markets will hope to stabilize after yesterday’s slump, with the Dow suffering its worst day’s performance since March. With markets already struggling to wrap their head around the continued efforts from Fed members to reign in rate cut expectations, the recent rise in energy prices does increase the risk of a resurgence for inflation going forward. The longer we see energy prices rise, the longer we are likely to wait until the Federal Reserve are willing to cut interest rates. The strength of the US economy is key within that, with yesterday’s surprisingly strong consumer confidence reading serving to highlight the risk that a strong economy allows the Fed to keep rates elevated for a longer time. The health of the US economy comes back into focus once again today, with the final third quarter GDP reading due this afternoon. The previous revision from 4.9% to 5.2% highlighted a strengthening economy as we move through the quarter, with any final upward revision likely to raise concerns over the Feds willingness to cut rates by the degree that is currently being priced by markets.