All eyes on the core PCE inflation release

• European markets weaken despite improved UK Retail Sales.

• Eurozone inflation bolsters expectations of ECB easing.

• All eyes on the core PCE inflation release.

European markets are on the back foot in early trade once again, with tariff fears driving risk assets lower globally. The losses seen throughout Asia and Europe highlight the growing fears as auto tariffs are set to be accompanied by retaliatory measures on the so-called “Liberation Day” next week. The sharp declines seen for the likes of GM and Ford highlight the fact that even the companies Trump seeks to benefit from his measures will be hit by higher costs that will dent profits over the coming years. With Trump’s efforts to rip up trade relationships with ‘friend and foe,’ there has been a continued push towards gold as a haven asset over US treasuries. That notably showed up within the UK retail sales report, with consumers flocking to the precious metal in a bid to shield themselves from the volatility evident within global markets. The better-than-expected UK retail sales report provided some good news in the wake of a Spring Statement that saw the OBR slash their 2025 growth prediction in half from 2% to 1%. Nonetheless, with the ONS upgrading three of the past five quarters of growth and retail sales coming in above estimates, we are seeing support for the pound this morning.

The Spanish CPI print gave markets an insight into the kind of metrics we could see next week when the eurozone figures are released. A sharp decline in inflation saw CPI fall to a five-month low of 2.3%, tumbling from the peak of 3% in February. With French inflation remaining at a lowly 0.8%, there is a feeling that we could see the wider eurozone CPI metric head lower over the coming months. With Europe facing up to a trade war with the US, it is clear that the ECB will be expected to help out through a continuing of the easing policy seen over the past year.

Looking ahead, the inflation theme continues, with the Fed’s favoured core PCE price index release raising questions over a potential stagflation scenario once again. While Trump is yet to implement many of his tariffs, there is a fear that any pre-emptive rise in price pressures could be just the tip of the iceberg once those import taxes start to kick in. Jerome Powell may have signalled a willingness to look beyond that one-off tariff inflation impact, but the fact is that such a rise in prices ultimately leads to higher wage demands which may push an additional round of inflation throughout the US economy. Markets are clearly on an unstable footing, and a rise in today’s core PCE price index could spark a fresh round of selling pressure given the fear of what may be around the corner in the coming months.