We said last week the market faced a test with the US CPI (consumer price index) report and that’s exactly how it turned out, with a third successive hotter-than-expected print sending the S&P 500 index down 2% on the week, its worst five-day performance since last October.

As expected, it was the ‘core’ reading excluding food and energy prices which did the damage, with services inflation – the Federal Reserve’s big bugbear – rising instead of falling, even excluding the controversial ‘shelter’ component.

Ron Temple, chief market strategist at Lazard, summed up the problem both for the Fed and the markets: ‘Three months of surprisingly strong services inflation are difficult to explain away and suggest demand strength could be sustaining elevated US inflation, which limits the Fed’s ability to ease policy.’

In contrast, the decision by the ECB (European Central Bank) to leave rates unchanged surprised absolutely no-one but its determination to cut in June regardless of what the Fed does is beginning to raise eyebrows in the currency markets.

UK and European inflation readings this week will be closely watched but any negative surprises are unlikely to have the same impact on stocks and bonds.

Traders are more likely to react to comments from the various Fed, Bank of England and ECB speakers who are doing the rounds, and any pronouncements from the Eurogroup gathering which precedes the upcoming Spring meetings of the World Bank and IMF in Washington.

Next week there are one or two UK data points of note, starting with March retail sales and house prices and ending with consumer confidence, which together should give a reasonable clue as to whether the recent economic bounce has legs or not.

Most of the attention will be on the US though, with first-quarter GDP and in particular the PCE (personal consumption expenditure) measure providing further context for the timing of US rate cuts. 

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