US inflation data in focus

The futures indices are pointing to a tepid start for stocks in Europe and the US on Wednesday, as weakness in the tech sector acted as a broader drag after another earnings downgrade on Tuesday, this time from Micron, following another by Nvidia on Monday.

The recent weakness in the European economy is likely to result in a cautious start to the European markets as investors look for signs that inflation is beginning to peak. The main focus of today's market is whether we have reached the peak of US CPI. This is because markets are gearing up for the possibility of a significant move should either side of the headline number miss the mark by a considerable amount.

It is expected that headline inflation in Germany will reach 8.5%% in July, while China's consumer price index reported 2.7% for July, up from 2.5% in June, which was expected to be 2.5%. On the other hand, China's Producer price index plunged sharply from 6.1% to 4.2%. Still, a steeper decline in Chinese consumer prices is expected when considering the various stop-start lockdowns that have hit the country. As a result, getting a sense of inflation in the world's second-largest economy is a more challenging endeavour.

The US consumer price index unexpectedly rose sharply in June to a new record 40-year high of 9.1%, causing some experts to speculate that the Federal Reserve might be tempted to increase interest rates by 100 basis points in July. Although it was the headline number that grabbed all the attention, it was worth noting that core prices fell from 6% to 5.9% in June.

The overall outlook for US consumer prices in July is expected to be much slower than in June after the price of gasoline dropped sharply over the past two weeks.

Investors expect year-on-year headline inflation to have jumped by 8.7%, down from 9.1% in June. The core inflation rate is expected to be 0.5% month-over-month.

According to the Fed funds futures, there is currently a 70% probability that the Federal Reserve will raise rates by 75 basis points in September.

Due to this, the dollar is trading steadily in Asia, while stocks stumbled to their lowest point in a week due to tech-induced declines in the US.

Taiwan's foreign minister emphasized the geopolitical risks posed by China's military drills during US House Speaker Nancy Pelosi's visit, saying they were part of a game-plan to prepare for a possible invasion of the self-ruled island in the future.

Events of today

As part of today's highlights, investors will be watching for the latest US July CPI data to be released. Further, Charles Evans, the president of the Federal Reserve Bank of San Francisco, is scheduled to speak on the economy later today, which may give additional insight into the Fed's outlook if inflation slows down in the near future.