Relief as US inflation offers hope

European stock markets are heading for the second day of losses at the start of the week while the US is enjoying a boost following the latest inflation data.

I never thought I’d see markets responding positively to inflation rising 1.2% on the month and 8.5% on the year but these are not normal times. The headline numbers still don’t make for easy reading, especially for households that are continuing to see real incomes fall as a result of higher prices, particularly for energy and food.

But two things stand out from the report that is giving investors hope that inflation is peaking. One is that following months of the headline rate far exceeding expectations, today’s number was roughly in line which has come as a relief. The report has delivered a monthly blow to the markets for a long time now and that may be at an end.

More importantly, core inflation – which strips out volatile food and energy components – was much lower than expected on a monthly basis and a little below on an annual basis at 6.5%. Again, there isn’t much to celebrate about that number but the trend has been a major concern and this report suggests it may be about to improve.

After a period of US yields rising and markets pricing in an increasingly aggressive tightening cycle, the inflation data has come as a relief. Yields have slightly pared gains, the dollar has softened and stock markets have bounced back; particularly the tech sector which has once again been hammered as a result of rapid tightening expectations.

Of course, this is just one report. But it comes at a time when many expected inflation to peak so goes some way to confirming those views. A lot can obviously change and repeatedly has. But oil prices have eased in recent weeks thanks to the SPR release and lockdowns in China, among other things, which could be important.

Bitcoin has a minor rebound but support looks vulnerable

Bitcoin has had a tough time recently but is paring some of those losses today as it tries to hold above USD 40,000. A significant move below here would be another blow as it continues to experience substantial downside pressure. A  7% hit on Monday will have come as a bit of a shock but it occurred alongside a broader risk-off move in the markets. Perhaps more concerning is how minor the rebound has been which could cause a wobble in the near term.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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Author: Craig Erlam