European stocks have ticked higher on Wednesday after some earnings reports and a drop in Treasury yields boosted risk sentiment. However, we cannot understate the importance of today’s US inflation reading. It comes as the market has pushed back its expectation for the first US interest rate cut to September, and investors seem to be positioned for bad news. Added to this, Fitch, the ratings agency, revised China’s outlook from stable to negative, saying that it expects China’s government to grow its debt pile to stimulate the economy.

This is the second ratings agency to do this, after Moody’s warned on China in December. Financial markets have mostly brushed off the Fitch news on China, however, it comes at an important time for China as the market waits for key economic releases including CPI and PPI, money supply and loan rates. The CSI 300 is lower on Wednesday and fell 0.8%, bucking the global trend for higher stock prices.

Nvidia – a victim of its own success?

There have been some notable under performers in the US stock market space this week, including Nvidia. It fell 2% on Tuesday and is expected to open lower on Wednesday. It is down by 10% in the past month as investors worry about the long term outlook for inflation. As we lead up the CPI report, the S&P 500 is just above the 5,200 level. Although volatility has ticked higher, the US blue chip index is still less than 1% away from its all time high, so the recent volatility has not knocked this index too far off course, even though the AI darlings have come under intense selling pressure in recent weeks.

In some ways, Nvidia is a victim of its own success. When valuations are stretched like they are right now, anything less than perfect economic data along with geopolitical noise can create substantial sell offs. We have mentioned in previous notes that US breakeven inflation rates have been moving higher, and the 2-year breakeven inflation rate (which is a measure of future inflation expectations) is 2.8%, up from 2% in January. The market is pricing in higher longer term inflation, and this may also weigh on the tech sector, as it could increase the discount rate for future cash flows. If inflation is going to be higher for longer, could this knock the uptake of AI across the economy more broadly? If companies have less to spend on capex and AI, than this could become a problem, however, we won’t be able to tell if this is a possibility until earnings season, which kicks off this week. The higher for longer inflation theory is also driving a changing of the guard in stock market performance. Oil and energy companies are leading the pack, and even outperforming the semiconductor sector in recent weeks.

Why are Treasury yields falling?

This is a conundrum, the 10-year Treasury yield is lower by 10 basis points this week, even though inflation is expected to tick higher, and the markets have been tempering bets on Fed rate cuts. We think that the reason for this is that the market is bearish as we lead up to the CPI report for March, and this is leading to investors treating Treasuries like safe havens and when investors buy treasuries, yields fall. This highlights the end of the correlation between the S&P 500 and US Treasury yields. Bonds are now becoming a destination for investors who might be bailing on equities after such a strong run in Q1.

Tesco’s strong earnings report fails to impress investors

Tesco’s earnings for 2023/2024 beat expectations as adjusted operating profit came in at £2.89bn, above the £2.75bn the company had predicted earlier this year. Tesco’s group sales ex fuel were £61.4bn, this is significantly higher than a year ago, when sales growth was £57.2bn. After tax profit was a decent £1.19bn, up from £736mn a year ago. There was more good news for investors, the company also announced a £1bn stock buy back. The gains for Tesco’s stock price were fairly muted on the back of this of this report and the stock price was higher by just 0.5% at the time of writing. The market may have been disappointed by Tesco’s forward guidance, which was £2.88bn adjusted profit for 2025. This is about 3% lower than consensus, which may have tempered investor enthusiasm towards these results. Even so, Tesco’s stock price is higher by 8% over the past year and is easily outperforming the FTSE 100.

Tesco shows us the real strength of the UK consumer

Tesco is the UK’s largest grocer, and its results can give us an idea about the strength of the average UK consumer and consumer trends for the future. The commentary that accompanied the results was encouraging on this front. It said that price pressures have decreased ‘substantially’. It also said that it was gaining new premium customers, along with  benefitting from its Aldi price match scheme. Overall, Tesco noticed improving consumer sentiment. This is interesting, since GFK UK consumer confidence has been rising in 2024, but remains in negative territory and has moved sideways recently. Thus, the results from Tesco suggests that the UK consumer is stronger than they say they are, and that official confidence data is understating the strength of the UK consumer.