The US inflation pace is expected to ease in August

It's shaping up to be a mixed start for European stocks on Tuesday as global markets prepare for the latest reading of US inflation data, which is expected to be released later in the session.

Despite speculation that inflation has nearly peaked, US stocks rose on the final day of trading before releasing critical consumer-price data. During the past four days, the S&P 500 has recorded its most significant gain since June, and Asian equities extended the rally. There is a high likelihood that the August CPI report for the US session will show a slowdown in inflation in August, down to 8% annually. 

Fed and inflation expectations

CPI is one of the last pieces of inflation data the US Federal Reserve will see before its September meeting. Central bank officials are expected to hike interest rates by 0.75 percentage points for the third consecutive time.

When it comes to fighting the Federal Reserve on many occasions, stocks do not hesitate to do so once or twice. In the wake of declining crude oil futures, which are bolstering the idea that inflation may be peaking, stocks and other risk assets are rallying once again. This is despite a decidedly hawkish stance by the US central bank. Just over two weeks after Chairman Jerome Powell stated plainly that interest rates are likely to rise and remain there for a more extended period than most expect. Powell reiterated last week that he is "strongly committed" to bringing inflation down.

Even though inflation is still soaring, the pace has moderated in August, as gasoline prices fell, supply chains improved, and the cost of travelling fell along with them.

US inflation in August

The CPI for all items is projected to have declined by 0.1% month-over-month in August, after a flat reading in July, according to Dow Jones. Consequently, the headline CPI would be running at an annual rate of 8%, down from 8.5% in July.

However, excluding gasoline and food, core CPI is expected to rise by 0.3%, as in July. Year-over-year growth would translate into a 6% increase, an even bigger jump than the 5.9% gain recorded in July.

EU economic data on Tuesday

Several key economic data will likely set the tone for Tuesday. The UK claimant count increased to 6,300 in August, which was disappointing. However, the unemployment rate decreased from 3.8% to 3.6%, indicating that the country's labour market remained healthy despite the headwinds of rising prices.

The German consumer price index rose 0.3% in August, down from 0.9% the previous month, but the annual rate rose to 7.9% from 7.5%.

ZEW's economic sentiment survey will likely come in ugly later in the day based on these German inflation numbers. They will, however, probably be overshadowed by the US data.

Crude oil awaits the latest OPEC report

Other asset classes also struggled on Tuesday, with oil prices falling amid fears that more COVID lockdowns in China would hit demand. OPEC's monthly outlook report is due later in the day. The COVID lockdowns in China, the world's largest crude importer, have sparked a severe drop in oil imports this year, threatening to reduce Chinese oil demand.

Crude oil prices have recovered strongly from their seven-month lows, which were hit last week, as traders bet that further tightening of supply by Russia, coupled with a European energy crisis, will boost prices later this year. However, concerns regarding the slowing economy and the strong dollar have cast doubt on the sustainability of Asian markets' demand.

Further causing jitters, recent travel restrictions disrupted China's Autumn festival celebrations, which typically spur a spike in road travel during this time of year.