Markets uncertain as we look ahead to key US inflation release

• Chinese markets lose ground as inflation data falls further into deflation
• US CPI to derive sentiment in key week for markets
• Friday’s US jobs report sees pricing for a March rate cut ease

A changeable start for European markets has seen many of the main indices flittering into and out of positive territory as traders await a week of heavy data to shape sentiment as we head into the year end. Chinese stocks continue to suffer as weekend inflation data dented confidence around any impending rebound for the economy. With Chinese consumer prices falling further into deflation (-0.5%), and factory prices moving back down to -3%, the wider outlook does highlight the potential for this disinflation to be exported around the world through lower goods prices.

Inflation looks set to dominate this week, with tomorrows US CPI release likely to help outline the trajectory towards target. With energy prices having been hit hard under the weight of record US crude oil production, the headline inflation gauge looks primed to head lower despite somewhat cautious expectations. The eurozone November figure of -0.5% highlights the potential for US CPI to similarly post a negative monthly figure, which would undoubtedly help highlight a trajectory that may justify market expectations of a March return to target.

Friday’s US jobs report provided the basis for a more hawkish stance at the Fed this week, with markets gradually easing back on their rate cut expectations. With questions remaining over whether headline (3.2%) and core PCE (3.5%) inflation will hit target by March, the strength of the US jobs market highlights the potential for a relatively hawkish take from the Federal Reserve on Wednesday. The Federal Reserve forecasts should provide a strong basis for markets to base their expectations upon, and it has become quite apparent that the US jobs market remains incredibly resilient despite the restrictive actions of the Fed.