Inflation data key as we head into a volatile end to the week

European markets are attempting to reverse yesterday’s losses, although the FTSE 100 is struggling to replicate the gains seen throughout mainland indices as the pound strengthens against the dollar. A mixed Asian session saw Japanese stocks shine through as the one ray of light, with the Nikkei 225 pushing through 34,000 for the first time since 1990. Markets are clearly confident that we will not see any significant monetary tightening from the BoJ, with Monday’s Tokyo CPI decline followed by a sharp slump in the cash earnings figure overnight (0.2% from 1.5%). The fear for the BoJ is that this period of elevated inflation does not translate into a new phase of elevated wage growth. With that in mind, last night’s collapse in the cash earnings figure sets back the BoJ and dampens the likeliness of a rate hike.

Crypto markets remain on tenterhooks as the SEC look set to announce their decision with regards to a raft of Bitcoin ETF products. Yesterday’s hack of the SEC Twitter account served to provide an insight into the type of price action we could expect if approved today, with initial gains quickly eroded to embolden calls for an impending “buy the rumour-sell the fact” decline. While there will be many who are trading around this decision, those long-term crypto holders will see this as a momentous step towards bringing a fresh wave of speculative funds into an asset which has limited supply.

Early optimism seen throughout financial markets may be difficult to maintain given the uncertainty within markets as we head into a crucial second half of the week. Between tomorrows US inflation report, and the earnings from a raft of big banks, we should gain greater clarity over market sentiment by the weekend. The weakness we are seeing in US 10-year yields does highlight a growing confidence in lower rates, despite the potential for an unwelcome rise in US CPI tomorrow. With both headline and core CPI both unlikely to hit 2% by March, the market expectations around a potential rate cut at that point looks to be built on the high likeliness of a return to target for the Fed’s favoured core PCE metric.