Stock markets made modest gains on Tuesday and the dollar weakened, ahead of a widely anticipated US inflation report that investors will scrutinise for clues about the future path of monetary policy.
The tentative advances for equities came as investors looked ahead to US inflation data due to be released at 1.30pm (BST). Economists polled by Reuters expect the consumer price index for August to register a reading of 8.1 per cent year on year, down from 8.5 per cent in July, with the headline figure pushed down by weaker energy prices.
But core CPI — which strips out volatile items such as energy and food — is forecast to have risen from 5.9 per cent to 6.1 per cent in the world’s largest economy.
“Markets are betting on inflation decelerating,” said Nadege Dufosse, head of cross-asset strategy at Candriam. “If we have a negative surprise on core inflation, of course it’ll have a negative impact on markets.”
Tuesday’s data will be assessed closely by traders ahead of the US Federal Reserve’s next monetary policy meeting in late September, with markets pricing in the probability of a third consecutive 0.75 percentage point interest rate rise by the central bank. The Fed’s current target range stands at 2.25 to 2.50 per cent.
Equity markets have fallen this year with a FTSE gauge of global shares down 16 per cent as the Fed and other big central banks jack up borrowing costs to curb inflation, stoking fears that such policy tightening might compound an economic slowdown.
Kristina Hooper, chief global market strategist at Invesco, said the US economy was “still fundamentally sound” but added that the Fed “has readily admitted that it will take time for the negative effects of tightening thus far to show up in the economy”.
Hooper added that the Fed “will honour its pledge of being data dependent, and there is still a good chance it could deliver only a [0.5 percentage point] hike in September”.
The dollar has weakened in recent days, while the euro has advanced on the back of a three-quarter-point interest rate rise by the European Central Bank last Thursday — indicating a narrowing of policy divergence between the Fed and the ECB.
The dollar lost 0.3 per cent against a basket of six other currencies on Tuesday, after sliding 0.7 per cent in the previous session.
Futures contracts tracking Wall Street’s broad S&P 500 stock index, which often advances when the dollar falls due to its weighting towards multinationals, added 0.4 per cent.