US inflation to dictate the market mood

European stocks head cautiously higher ahead of US CPI data. Banks are in focus, with big names reporting quarterly earnings across Europe. 

• US CPI is expected to rise to 7.3% and boost hawkish Fed bets
• High inflation & a hawkish Fed could boost banks further
• FX markets are quiet pre-release, gold consolidates at 2-week high

After another strong finish on Wall Street, which saw the Nasdaq book 2% gains, European stocks are set for a positive open. This also comes after a solid session for European indices yesterday, which saw the DAX close 1.8% higher and the FTSE hit a two year high.

US CPI

There is only one show in town this week and that’s the US inflation report (CPI). All eyes are fixed on the data, which is due to be released ahead of the US open today. Expectations are for inflation to rise to 7.3% YoY in January, up from 7%. On a monthly basis, CPI is expected to rise 0.5% MoM, in line with the previous month.

The data comes hot on the heels of January’s impressive jobs report which not only revealed strong job creation in January, but also an upward revision to December’s payroll numbers. With over 900k payrolls added across the two months, bets rose that the Fed could adopt a more hawkish approach to policy normalisation and a 50-basis point hike in March started to look more likely. 

High inflation data will fuel bets of a more aggressive Fed, which could prompt further volatility in what has already been a rollercoaster of a ride in 2022. The rotation out of high growth tech could come back into play, reversing some of the 5% gains seen on the Nasdaq over the past two weeks. The banking sector will also be in focus, as banks are likely to benefit from higher interest rates which lift their net interest income. US bank, Wells Fargo, has rallied over 20% so far this year and on this side of the Atlantic, Lloyds trades over 3% higher just this week.

We will hear from BoE Governor Andrew Bailey today. His comments will be closely listened to, given the more cautious tone from BoE chief economic Pill yesterday, who cautioned against an aggressive approach to raising interest rates.

European banks report

As mentioned, banks will be in focus, not only due to the release of US inflation data later but also following a string of quarterly earnings from big banks across Europe. Credit Suisse will be keen to draw a line under a tough 2021, after posting a CHF 2 billion net loss owing to provisions to settle legal costs from the Greensill fallout. Société Générale and Credit Agricole’s numbers were more upbeat and could provide clues for UK banks which report next week.

FX & Gold

Movement in the FX markets is muted as few are prepared to take on big positions ahead of the key inflation data. The European Commission will release its quarterly economic forecasts which could prompt a reaction in the euro, particularly if inflation is expected to fall. EUR/USD currently holds above 1.14.

Gold is consolidating around a two-week high ahead of CPI. The precious metal scaled up to 1834 supported by high inflation expectations and Russia – Ukraine tensions. However, a more aggressive Fed could be bad news for non-yielding gold.