USstock markets were already on the ropes before the release of PCE (personal consumption expenditures) inflation data and the University of Michigan consumer confidence report on 28 March, but it was the latter which stoked further losses, taking the S&P 500 down almost 2% on the day.
Most concerning for investors was the combination of falling consumer confidence and sharply rising inflation expectations, driven by tariff concerns.
Economist James Knightly at investment bank ING commented: ‘US data is only inflaming stagflation fears.’
The final reading of the University of Michigan confidence index was revised down to 57, from a preliminary reading of 57.9. The drop reflected a substantial deterioration in consumer expectations.
The survey’s director Joanne Hsu said: ‘This month’s decline [in sentiment] reflects a clear consensus across all demographic and political affiliations.
‘Republicans joined independents and Democrats in expressing worsening expectations since February for their personal finances, business conditions, unemployment and inflation,’ added Hsu.
Meanwhile survey respondents believe inflation will average 5% over the next year and stay above 4% for the next five years, the first time longer-dated expectations have topped 4% since 1993.
The latest reading of core PCE, which is the Federal Reserve’s favourite measure of inflation came in at an annualised 2.8%, slightly above the 2.7% expected by economists.
It is not just consumers who are getting jittery about inflation. Bond investors are concerned too, with two-year implied inflation creeping above 3% for the first time since the mini-banking crisis in the spring of 2023.
The PCE report showed consumer spending increased by 0.4% month-on-month, falling shy of the 0.5% increase economists had anticipated.
The data prompted Goldman Sachs (GS:NYSE) to revise down its forecast for first quarter GDP by 0.4% to an annualised 0.6%, with the investment bank citing softer than expected consumer spending and a downward revision to January’s growth.
US stock markets served up their worst quarterly performance since 2022 in the first three months of 2025 and the worst relative return against the rest of the world since the second quarter of 2002.
This is reflected in defensive sectors leading the way including cigarette maker Philip Morris International (PM:NYSE) which is up by a third and making new highs, and telecoms giant AT&T (T:NYSE) which is up by a quarter and making new five year highs.
The world’s second largest healthcare group CVS Health (CVS:NYSE) is up by a whopping 50% so far in 2025, demonstrating the classic defensive features of the sector.
Electric car maker Tesla (TLSA:NASDAQ) is one of the worst casualties of the ‘risk-off’ mood, falling by nearly 40%.
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