With around 40% of S&P 500 constituents reporting earnings last week including heavyweights Microsoft (MSFT:NASDAQ) and Alphabet (GOOG:NASDAQ), the micro picture was widely expected to be the main investor focus.

As things turned out, a surprisingly weak first quarter GDP (gross domestic product) print and higher-than-anticipated March inflation gave investors and the Federal Reserve further pause for thought on the likely path for inflation and interest rates.

For the first time in a few months, the dreaded phrase ‘stagflation’ began to be uttered in some corners of the market.

Fitch Ratings head of research Olu Sonola said: ‘If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly out of reach.’

Market implied cumulative rate cuts in 2024 have been slashed from 1.5% in January to just 0.35%.

The US economy grew at an annualised 1.6% rate in the three months to March compared with the 3.4% rate seen in the final quarter of 2023 and well below economists’ forecasts of 2.4%.

A closer inspection suggests the message of a slowing economy is not as clear cut as the headline numbers first suggest: slower federal government spending and inventories acted as a drag on GDP, as did foreign trade.

Stripping out these effects, underlying demand as measured by inflation-adjusted final sales to the private sector rose at an annualised 3.1% rate. Spending on services increased by the most since the third quarter of 2021 as healthcare and financial services-fuelled growth.

Meanwhile, core PCE (personal consumption expenditures), the Federal Reserve’s preferred measure of inflation, jumped at a 2.8% annualised rate in March driven by a larger-than-expected 0.5% increase in inflation-adjusted consumer spending.

A consequence of US resilience and a Fed on hold is playing out in currency markets as the US dollar is buoyed by diverging central bank interest-rate policies.

The Japanese yen weakened to its lowest level since 1990 on 29 April, after briefly surpassing ¥160 before retreating to ¥156 on suspected intervention by the Bank of Japan.

A weak yen makes imports of food and other products more expensive and potentially increases domestic inflation. Last week, finance minister Shunichi Suzuki said he was concerned about the impact a falling yen could have on inflation. The currency has dropped by around a tenth so far in 2024.

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