UK inflation surprise and tariff fears rattle markets

​​​UK inflation proves stickier than expected

​December's consumer price index (CPI) reading came in at 3.4%, above the 3.3% consensus and marking a rise from November's 3.0%. The increase was largely driven by higher tobacco duties and elevated airfares, but the breadth of price pressures suggests inflation remains far from beaten.

​Core inflation held at 3.2%, exactly matching forecasts but still uncomfortably high for policymakers. The Bank of England (BoE) has made clear it needs to see sustained progress on underlying price pressures before cutting rates further.

​Services inflation edged up to 4.5%, slightly below the 4.6% forecast but still elevated enough to keep the BoE cautious. This measure has become the key focus for the Monetary Policy Committee, given its link to domestic wage pressures.

​The immediate market reaction was muted. Gilt yields fell around 2 basis points as investors digested the data, while sterling held just above $1.34 with minimal movement.

​Rate cut expectations barely budge

​Money markets showed little reaction to the hotter-than-expected CPI print. Traders are still pricing around 43 basis points of BoE cuts by year-end, suggesting the market remains unconvinced that inflation will fall quickly enough to warrant aggressive easing.

​The BoE has already cut rates from 5.25% to 4.5% since August, but further moves depend on evidence that services inflation is cooling sustainably. This week's data doesn't provide that evidence.

​The FTSE 100 slipped marginally at the open, tracking small declines across European markets. The index has struggled to make headway this year, lagging behind Wall Street's stronger performance.

​UK retailers deliver mixed messages

​Corporate updates from United Kingdom (UK) retailers painted a varied picture of consumer sentiment. Currys upgraded its profit outlook after strong festive sales, suggesting shoppers are still willing to spend on electronics and appliances despite broader cost pressures.

JD Sports flagged resilient peak trading but warned of weaker conditions in the UK and Europe. Group like-for-like sales fell 1.8% in the fourth quarter (Q4) to date, though organic growth of 1.4% was supported by an improving trend in North America.

​J D Wetherspoon reported like-for-like sales up 4.7% over 25 weeks, accelerating to 8.8% over Christmas. However, higher cost pressures mean first-half profits are likely to fall year on year, with full-year performance expected slightly below last year's levels.

​Burberry offered a rare bright spot in luxury retail, with third quarter (Q3) comparable retail sales up 3% and reported revenue rising 1% to £665 million. Sequential improvement across regions suggests the group's turnaround efforts are gaining traction.

​Wall Street suffers sharp selloff

​US equities fell sharply on Tuesday after the Martin Luther King holiday, with the S&P 500 down 2.0%, the Nasdaq 100 off 2.4% and the Dow Jones lower by 1.8%. This marked the worst one-day decline in around three months.

​The catalyst was President Trump's threat of fresh tariffs on European countries, linked to demands over Greenland. This revived memories of April's trade shock and raised fears of renewed policy-driven volatility just as markets had begun to price in a more stable environment.

​Risk-off rotation dominated trading, with gold surging to fresh record highs above $2800 an ounce as investors sought safety. The CBOE volatility index jumped to a two-month high, signalling heightened uncertainty.

​Bond markets face multiple pressures

United States (​US) Treasuries sold off, led by the long end of the curve, as multiple factors combined to push yields higher. The move was partly driven by spillover from a sharp rout in Japanese government bonds, where concerns over fiscal policy and potential snap elections rattled investors.

​The US dollar suffered its biggest daily fall in over a month, as reports emerged of overseas investors cutting exposure to US assets. This "sell America" narrative added to pressure across equities, bonds and foreign exchange markets.

Sterling held relatively steady against the weaker dollar, supported by the UK inflation data which reinforced expectations that the Bank of England (BoE) will move cautiously on rate cuts. Currency traders saw the pound as a relative safe haven amid broader dollar weakness.

​Netflix disappoints despite strong results

​Netflix delivered Q4 results that beat revenue and earnings per share (EPS) expectations, while also lifting near-term guidance. Yet shares fell in after-hours trading, suggesting investors had priced in even stronger performance or were disappointed by aspects of the outlook.

​The streaming giant continues to add subscribers and grow revenue, but questions persist about the sustainability of growth rates and the impact of increased competition. The market's negative reaction despite solid fundamentals highlights how sensitive valuations have become.