It’s a quiet calendar after a busy few weeks of big risk events. But markets will focus intensely on Thursday’s US inflation data, the first release of two CPI reports ahead of the September FOMC meeting. The June figures were pivotal for the current pause or skip Fed phase as a modest 0.2% monthly print brought annual headline inflation down to 3%, a third of its peak level. Consensus expects a similar outcome on Thursday, though the annual reading will likely tick up due to a base effect which reflects falling energy costs last summer dropping out of the annual comparison. Attention will be paid to price pressures in services. Shelter costs will also be in the spotlight due to their weight and scale in the CPI basket. They may keep inflation above the Fed’s 2% target for some time.

The slew of recent central bank meetings has highlighted that we are close to the end of the tightening cycle, one which has been one of the sharpest in monetary policy history. Rate hikes arguably take up to 18 months to impact the economy and markets may now need to heed the words of a former Bank of England official who last week spread a note of caution due to the “powerful, delayed monetary tightening” that could hit economies in the coming months.

In the meantime, this week’s big market moves were in bonds and Treasuries which remained under pressure due to the toxic combination of resilient US activity indicators, rising supply after the US stepped up plans to borrow more money, and the impact of the Fitch debt downgrade. The 10-year US Treasury yield popped up to levels last seen in November. The current market theme has pinned its hopes on a “soft landing” which ultimately would erode the chances of interest rate and borrowing costs falling sharply any time soon. That could be a negative for risky assets like stocks which have had a bumper first half of the year.

Major risk events of the week

09 August 2023, Wednesday

–China CPI: The market median is for the July print to fall to -0.5% from a flat reading in June. Analysts say fixed prices and excess capacity should keep inflation low. Recently adopted measures by the government have yet to impact the economy.

10 August 2023, Thursday

-US CPI: The headline inflation print is set to pick up to 3.3% y/y from 3% in June due to an adverse base effect and remain unchanged at 0.2% m/m. The core rate is forecast to fall to 4.7% from 4.8% previously, with the monthly rate at 0.2%. There is one more CPI report the week before the next FOMC meeting in September. USD took a tumble after Friday’s labour market report showed a softening in certain areas. The cooling employment cost index and this expected benign report should add to the sense that the Fed’s work is done on tightening policy.

11 August 2023, Friday

-UK Q2 GDP: Last month’s data showed that the King’s Coronation and the extra bank holiday did little to change the monthly GDP reading. That means overall Q2 growth is likely to come in modestly positive which would confirm the economy is more-or-less stagnant. GBP suffered a third straight week of losses as markets see two more rate hikes by the BoE hitting the economy hard in the near future. But long-term trendline support from the March low could be acting as support.