CashNews.co
Stay informed with free updates
Simply sign up to the Global Economy myFT Digest — delivered directly to your inbox.
After a weak US jobs report sparked a major global stock sell-off this week, investors will be watching inflation data for the world’s biggest economy more closely than usual this week.
Figures published on Wednesday are expected to show US consumer prices rose at an annual rate of 3 per cent in July, unchanged from the previous month, according to economists’ forecasts compiled by Bloomberg.
But core inflation, which has stayed stubbornly elevated even as the Federal Reserve has kept interest rates at 23-year highs, is expected to fall slightly to 3.2 per cent from 3.3 per cent in June. Core inflation strips out the volatile food and energy sectors.
Any sign that inflationary pressures are picking up again could spook markets that have become highly sensitive to economic data.
“An unexpected upside surprise to inflation would likely cause the larger market reaction, including a move higher in yields pricing out some of the substantial rate cuts now expected from the Fed this year,” said analysts at Citigroup.
Investors increased their bets on Fed cuts following the jobs report on August 2, as global equity markets went into meltdown. While some of the more extreme bets on lower borrowing costs have since been unwound, traders still expect the central bank to cut rates by a full percentage point this year — indicating a jumbo half percentage point cut at one of its remaining three meetings — from their current 23-year high of 5.25 per cent to 5.5 per cent. 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 knife-edge decision to cut interest rates this month, could also make a big impact in markets.
Economists are forecasting a small rise in annual consumer price inflation to 2.3 per cent because of rising energy prices, ending two months of inflation hitting the BoE’s target of 2 per cent.
Rate-setters at the central bank have been divided over the path for interest rates, with the Monetary Policy Committee this month voting to cut benchmark borrowing costs for the first time since 2020 by five votes to four.
Traders will in particular be looking at services inflation, a key measure of domestic price pressures, which accelerated to 5.7 per cent year-on-year in June. That was higher than forecasts and convinced some BoE policymakers that interest rates needed to stay higher for longer. For July, economists expect services inflation to slow slightly to 5.5 per cent.
Swaps markets are pricing in just under 0.5 percentage points of cuts this year. Sanjay Raja, UK chief economist at Deutsche Bank, suggested the July data could make the central bank more cautious about future rate cuts.
“It’s still showing some stickiness compared to where they were a few months ago,” Raja said. “They will want to see what the next few data points look like. This isn’t [a central bank] that is in a rush to cut.” Emily Herbert
Has the Tokyo market turbulence died out?
Tokyo’s Topix has clawed back a chunk of the historic losses it suffered on Monday, when the index suffered the worst session for Japanese stocks since October 1987.
Yet some traders remain cautious about piling back in to the country’s equity market.
After months of low volatility, the Bank of Japan’s decision to raise interest rates at the end of July boosted the value of the yen against the dollar. That accelerated a reversal of the yen carry trade long relied upon by global investors to fund bets on high-yielding assets including Japanese and US stocks.
The resulting sell-off wiped more than $1tn dollars from the value of Japan’s main stock index over three trading sessions, shattering investor complacency and erasing the market’s gains for the year.
Turbulence subsided over the second half of last week, with the Nikkei volatility index having fallen back after jumping on Monday to its highest level since the 2008 financial crisis. But many investors expect Japanese stocks to remain under pressure over the short-term and trading to be choppy.
JPMorgan analysts on Thursday said “interest in Japanese stocks remains strong” even as they lowered their end-of-year price targets for the Topix and the Nikkei 225.
“After the sell-off, we recommend sectors and stocks with a domestic 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 an August 14 subscriber webinar (1200BST/0700 EST) to discuss the recent trading turmoil and where markets go next. Register for your subscriber pass at ft.com/marketswebinar and put your questions to our panel now.