Marketmind: Don’t Break My Heart

A look at the day ahead in European and global markets from Anshuman Daga

Today’s inflation numbers from the world’s biggest economy on Valentine’s Day will be one of the most important economic data watched by markets.

While blockbuster January jobs data has forced some market participants to grudgingly accept that the peak is not yet near for interest rates, investors are still hopeful that the Federal Reserve could begin cutting rates later this year.

As Toronto-based independent proprietary trader Kevin Muir said: “I don’t know if it will be this release or the next one, but I suspect the market has accepted the return to inflation normalcy a little too eagerly.”

“There appears to be little fear about a lingering inflation problem. Sure, there are a few pundits warning about inflation, but the market is clearly screaming at the top of its lungs that inflation worries are misplaced.”

The market expects rate increases to ease despite Fed Chair Jerome Powell acknowledging last week that rates may need to move higher than expected if that sort of economic strength threatens the Fed’s progress in lowering inflation.

Economists polled by Reuters expect Tuesday’s CPI reading to show headline prices and the core CPI gaining 0.5% and 0.4% month-over-month for January, respectively. However, some recalibrated their expectations on Monday for a slightly lower CPI.

Asian shares edged up on Tuesday, while the yen recouped losses as Japan nominated a new central bank governor.

Adding to the positive momentum, sources said that U.S. Secretary of State Antony Blinken is considering meeting top Chinese diplomat Wang Yi at the Munich Security Conference starting this week.

This would mark their first face-to-face talks after the United States shot down what it said was a Chinese spy balloon and other flying objects.

Meanwhile, the deep freeze over UK assets is thawing.

After last year’s upheaval, Britain’s stocks and bonds are drawing strong investor interest, with the FTSE 100 stock index flirting with record highs as the bourse benefits from global trends such as the reopening of China’s economy and strong energy prices.

Ten-year government bond yields have fallen 27 basis points so far in 2023 to 3.4% in one of the biggest declines in government financing rates among the Group of Seven most advanced economies.

A Reuters poll published on Tuesday showed that the Bank of England will make its final increase to borrowing costs in the current cycle next month to combat double-digit inflation, while the economy is almost certainly entering a recession.

In Italy, Prime Minister Giorgia Meloni and her coalition allies scored emphatic election wins in the two wealthiest regions of the country, strengthening the right’s grip on power.

Meanwhile, Qatari investors are preparing to make a bid to buy Premier League club Manchester United in the coming days, Bloomberg reported.

Key developments that could influence markets on Tuesday:

European economic data: Euro zone flash Q4 GDP, UK Dec jobs, Jan unemployment count

U.S. CPI data due: Jan CPI – core CPI forecast at +0.4% from +0.3% in Dec, +5.5% year-on-year from +5.7%

(Reporting by Anshuman Daga; Editing by Jacqueline Wong)