Nerves ahead of US inflation

We’re seeing plenty of apprehension ahead of the US inflation report on Wednesday, with Asia in the red and Europe following suit.

It’s impossible to get away from the fact that the inflation report has held the markets back this week. There’s clearly a desperate desire to be more optimistic about the outlook; that’s evident from the scale of the recovery already seen in equity markets despite there being seemingly little to celebrate.

But the jobs report on Friday following on from the Fed commentary in the days running up to it has left investors fearing they’ve got carried away too soon and that data-dependency and aggressive tightening can go hand in hand.

I don’t think it’s an exaggeration to say that today’s inflation number could set the tone for the markets for the rest of the month. A lower than expected number could be a major tailwind for the markets while anything around or above the June reading could trigger a big risk reversal in the markets as the debate shifts to 75 or 100 basis points, with 50 left in the rearview mirror.

Encouraging inflation data from China

China is one of the few countries without an inflation problem as was evident in today’s CPI and PPI numbers. The headline CPI fell a little short of expectations, with higher pork and vegetable prices largely behind the increase to 2.7%. Core inflation remains subdued as domestic demand remains soft following lockdowns this year that are weighing on activity and putting the growth target further out of reach. Lower fuel and commodity prices contributed to the sharper decline in the PPI number, keeping the pressure off the PBOC to tighten monetary policy and even leaving room for further easing.

Momentum fades on approach to $25,000

Even bitcoin is looking a little nervy ahead of the inflation report. As odd as that sounds, bitcoin has shown itself to be very resilient of late, recovering quicker and seemingly not being as phased by setbacks. It will be interesting to see how it responds to any setback today or how well it capitalises on a favourable report. We have seen fading momentum in the run-up to $25,000 but a softer inflation number could be just the catalyst bitcoin needs to turn that around.

For a look at all of today’s economic events, check out our economic calendar:

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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