Will US Inflation Data Spook Markets?

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After a weak US jobs report sparked a major sell-off in global stocks this week, investors will be watching inflation data for the world’s largest economy more closely than usual this week.

Figures released Wednesday are expected to show that U.S. consumer prices rose at an annual rate of 3 percent in July, unchanged from the previous month, according to economists’ forecasts compiled by Bloomberg.

But core inflation, which has remained stubbornly high even as the Federal Reserve has kept interest rates at 23-year highs, is expected to ease slightly to 3.2 percent from 3.3 percent in June. Core inflation excludes the volatile food and energy sectors.

Any sign that inflationary pressures are rising again could spook markets that have become highly sensitive to economic data.

“An unexpected inflation surprise would likely cause a bigger market reaction, including a bigger move in yields, which would counter some of the substantial rate cuts now expected from the Fed this year,” Citigroup analysts said.

Investors increased their bets on Fed cuts following the August 2nd jobs report as global equity markets plunged. While some of the more extreme bets on lower borrowing costs have since been reversed, traders still expect the central bank to cut rates by a full percentage point this year – pointing to a jumbo cut of half a percentage point to one of the three remaining meetings – from their level. the current 23-year high of 5.25% to 5.5%. Kate Duguid

Will UK inflation make the Bank of England more cautious?

UK inflation data for July, which comes after the Bank of England’s blistering decision to cut interest rates this month, could also have a big impact on markets.

Economists forecast a small rise in annual consumer price inflation to 2.3% due to rising energy prices, ending two months of inflation hitting the BoE’s 2% target.

Rate-setters at the central bank were divided on the path for interest rates, with the Monetary Policy Committee voting this month to cut benchmark borrowing costs for the first time since 2020 by five votes to four.

Traders will be looking in particular at services inflation, a key measure of domestic price pressures, which accelerated to 5.7% from a year ago in June. This was higher than forecasts and convinced some BoE policymakers that interest rates must remain higher for longer. For July, economists expect services inflation to ease slightly to 5.5%.

Swap markets are pricing in just under 0.5 percentage points off this year. Sanjay Raja, chief UK economist at Deutsche Bank, suggested the July data could make the central bank more cautious about future rate cuts.

“They still show some stickiness compared to where they were a few months ago,” Raja said. “They’re going to want to see what the next few data points look like. This is not (a central bank) rushing to taper.” Emily Herbert

Has Tokyo’s market turmoil died down?

Tokyo’s Topix recovered some of its historic losses on Monday, when the index suffered its worst session for Japanese stocks since October 1987.

However, some traders remain cautious about the return to the country’s stock market.

After months of low volatility, the Bank of Japan’s decision to raise interest rates in late July boosted the yen against the dollar. That accelerated a reversal in the yen carry that global investors have long relied on to fund bets on high-yielding assets, including Japanese and U.S. stocks.

The resulting sell-off wiped more than $1 billion from the value of Japan’s main stock index over three trading sessions, dashing investor complacency and erasing market gains for the year.

Turmoil eased in the second half of last week, with the Nikkei volatility index falling after hitting its highest level since the financial crisis in 2008 on Monday. But many investors expect Japanese stocks to remain under pressure in the near term and trading to be hectic.

JPMorgan analysts said Thursday that “interest in Japanese stocks remains strong,” even as they cut their year-end price targets for the Topix and Nikkei 225.

“After selling, we recommend sectors and stocks with domestic market focus, defensive characteristics, resistance to (yen) appreciation and high shareholder returns,” the JPMorgan team wrote in a note to clients. George Steer

Join Kate Duguid, Robert Armstrong and FT colleagues from Tokyo to London for a subscriber webinar on 14 August (1200BST/0700 EST) to discuss the recent trading turmoil and where the markets are headed. Register for the subscriber pass at ft.com/marketswebinar and ask our panel your questions now.