All eyes on us inflation data given questionable Fed rate expectations

• FTSE 100 gains as commodity stocks push higher
• German economy continues to show signs of weakness after Gfk survey decline
• Core PCE inflation set to dominate

European indices are on the rise, as stronger commodity and banking stocks help the FTSE 100, and French luxury retailers basked in the glow of a 10% gain for LVMH. Yesterday’s surge in crude prices saw WTI reach the highest level in almost two-months, causing concern for those fearing a second wave of inflation. However, the FTSE 100 remains heavily geared towards commodity related stocks, and the recent signs of a stimulus-led resurgence in China could provide the basis for outperformance should the demand picture start to improve. The recent resurgence for China-related stocks appears to have come to an abrupt end overnight, with the Hang Seng losing 1.6% after gaining 8% over three days. Nonetheless, the prospect of a more proactive approach to kick-starting the Chinese economy could help lift sentiment to the benefit of commodity related indices such as the FTSE 100 and ASX.

The German economic outlook came under the microscope once again this morning, with the Gfk consumer climate survey falling into a ten-month low. Despite a sharp rebound last month, we have seen sentiment sour once again, doubling down on the worrying message brought about by yesterday’s worrying four-year low for the Ifo business climate gauge. With fourth quarter growth data due out next week, continued weakness could put pressure on the ECB to pull forward their first rate cut to March.

Today sees inflation dominate once again, with the Federal Reserve’s favoured core PCE metric due in the afternoon. Market expectations around the potential for a March rate cut from the Federal Reserve look foolhardy given the strength of the economy and a slower pathway to 2% inflation compared with their European counterparts. Nonetheless, the core PCE does appear to provide the quickest route back to target given that this metric has tracked at a sub 2% pace for the past six-months. However, neither the PCE nor CPI gauge look likely to hit the Fed’s target anytime soon, and thus market expectations continue to be founded on the idea that Powell will happily cut rates despite a strong economy and elevated inflation.