Financial markets focus this week: CPI data leads global volatility, central bank policy is key

After last week's slightly gloomy August US non-farm payrolls report, global financial markets are once again focused on a series of key economic data to be released this week, especially the US consumer price index (CPI) data, which will not only affect the health of the US economy, but also have a decisive impact on the size of the Federal Reserve's upcoming monetary policy adjustment in September. At the same time, the European Central Bank's interest rate decision and a series of economic data from Asian countries also affected the sensitive nerves of the market, indicating that this week will be a week of increased volatility in financial markets.

The ECB's path of cutting interest rates has been accompanied by controversy and uncertainty since it began in June. Although the first rate cut came as expected, it was quite embarrassing because of its "hawkish rate cut" posture. At the time, the instability of the data forced policy makers to act, but the market reaction was mixed. Heading into July, the ECB opted to sit tight and watch the economic data further. However, the drop in eurozone inflation to 2.2 per cent year on year reported in August and weak economic growth certainly provide sufficient justification for the ECB to ease policy more aggressively in September.

However, it is worth noting that while the headline inflation rate has eased, the services CPI has bucked the trend to rise to 4.2%, a new high since October 2023. The figures pose a new challenge for Christine Lagarde, the president of the European Central Bank. At the upcoming meeting, she may have to be somewhat cautious in her comments, while stressing the path of future rate cuts, but also having to face the reality of high service sector inflation. If Lagarde fails to articulate a wider rate cut ahead, the euro could find support and resume its upward trend.

Much of the dollar's recent volatility stems from speculation about how much the Federal Reserve will cut interest rates in September. Since Fed Chairman Jerome Powell signaled a possible rate cut at the annual Jackson Hole meeting in August, market expectations have diverged. Some investors are pinning their hopes on a more aggressive half-point rate cut by the Fed to counter downward pressure on the economy and cracks in the labor market. However, according to the data released subsequently, the US economy has not shown obvious signs of recession, and the risk of inflation still exists.

The US CPI data due on Wednesday will be the focus of market attention. If the data show that inflation continues to fall, especially if core inflation can come down significantly, then the probability of the Fed taking a 50 basis point rate cut will be greatly increased. However, based on current market expectations, core inflation is expected to remain unchanged at a high 3.2 per cent, which means the Fed is more likely to adopt a relatively conservative 25 basis point rate cut. Therefore, if the CPI data is in line with expectations or stronger than expected, the market may be disappointed, which will push the dollar higher.

In addition, the release of data such as the Producer Price Index (PPI) and the University of Michigan consumer sentiment survey will also provide the market with more information on the state of the US economy. In particular, changes in consumers' inflation expectations for the next one to five years will directly affect the market's judgment on the direction of the Federal Reserve's monetary policy.

Compared with the European Central Bank and the U.S. Federal Reserve System, the Bank of England's monetary policy adjustment is more subtle. After the first cut in August, the Bank of England is widely expected to keep rates on hold at its September meeting. This expectation is largely based on a strong rebound in the UK economy in the first half of 2024 and high wage growth and service sector inflation. However, with a series of important economic data on the horizon, the boe's final decision may be more complicated than the market expects.

Tuesday's jobs report for July will be one of the market's main focuses. Markets will be watching closely to see if the UK Labour market has stabilised after significant job losses at the start of the year. A strong jobs reading could further push up expectations of wage growth, adding to the inflationary pressure on the Bank of England. In addition, July GDP data on Wednesday will also provide the market with more information on the momentum of the UK economy. A poor reading could increase the chances that the Bank of England will cut interest rates in September, putting pressure on the pound.

In the global economic map, the economic data of Asian countries can not be ignored. It's going to be a data-intensive week in Japan. Monday's revision to second-quarter GDP is particularly crucial. A figure higher than market expectations of 0.8 per cent growth could further boost confidence in Japan's economic recovery and bolster expectations that the Bank of Japan will raise interest rates again this year. This expected change will directly push up the yen exchange rate.

To sum up, this week's financial markets will focus on the US CPI data, the European Central Bank's interest rate decision and the economic data of Asian countries will be fierce game. However, a deeper analysis of the data and the market reaction reveals many uncertainties and risks.

First, for the US CPI data, while the market expects the headline inflation rate to continue to decline, the high core inflation rate will remain a major problem for the Fed. In the search for a balance between inflation and employment, the Fed's decisions will inevitably be questioned by competing interests and markets.

Second, the path of the ECB's rate cuts is equally uncertain. While the rise in the services CPI provides more justification for a rate cut, Lagarde's comments at the press conference will directly influence market expectations and the direction of the euro exchange rate. If she fails to spell out more interest rate cuts ahead, markets may be disappointed and unnerved.

Finally, the economic data of Asian countries, while seemingly independent of the European and American markets, are actually closely linked to the global economy. Any recovery in the Japanese economy would have a profound impact on global financial markets. The market's interpretation and reaction to these data will further exacerbate market volatility and uncertainty.

Therefore, in this week's financial market game, investors should maintain a cautious and rational attitude, pay close attention to the release of various economic data and market reaction changes. At the same time, policymakers should also take full account of market expectations and reactions, and pay more attention to balance and stability when formulating monetary policies, so as to avoid market turbulence and risks caused by policy mistakes.