Markets have started the week cautiously, with equities consolidating after last week’s strong rally. US equities have edged marginally lower, while European markets have remained relatively resilient, supported by stronger earnings.
It has been a quiet week for markets so far, with global markets showing a largely muted tone as investors await a clearer catalyst. A relatively light economic calendar and limited corporate earnings have left investors with little to drive conviction, placing the focus firmly on today’s US inflation data.
The July US CPI release will be closely watched for further clues on the Federal Reserve’s interest-rate path. Last week’s softer-than-expected jobs report has increased expectations that the US economy may be losing momentum, but uncertainty remains around the timing and extent of any future rate cuts. Whilst today’s inflation data won’t capture the most recent rise in energy costs, it will be important in determining whether recent disinflationary progress is continuing, or whether persistent price pressures could limit the Fed’s room to ease policy. The annual CPI rate is forecast to slow to 3.4% from 3.5% in June 2026.
Currency markets are likely to remain highly sensitive to changes in Fed rate expectations. In Japan, the yen has surrendered much of its recent gains, weakening to 159.45 against the U.S. dollar, its lowest level since coordinated intervention by Japanese and U.S. authorities helped strengthen the currency to around 155.2 last week. At the same time, expectations of a September rate hike have continued to build as Bank of Japan policymakers increasingly call for a more decisive response to rising inflationary pressures.
Geopolitical developments see Brent crude sitting just under $90 per barrel following renewed disruption around key Middle Eastern shipping routes, including an attack by Iran-backed Houthi forces on a cargo vessel and a US military strike on a container ship attempting to breach the blockade of the Strait of Hormuz. Whilst there were reports from Pakistan’s defence minister that the U.S. and Iran are close to reaching some form of agreement, there has been little in the way of concrete developments, leaving markets cautious about pricing in any near-term breakthrough.
Investors are now awaiting euro zone industrial production and UK GDP data, as well as US retail sales, PPI and University of Michigan Consumer sentiment.
Nicola Tune, Portfolio Specialist
