Hard evidence on inflation the focus this week

As investors return to the markets after the Easter break the conflict in the Middle East is firmly in focus. There is little agreement about the facts on the ground, let alone what “victory” might look like. The potential for statements and events to drive headlines and markets remains elevated.

However, by the end of the week investor thinking may turn to the secondary impacts of the conflict as important inflation data is released.

There is a significant shift in the global investment environment occurring now. The outbreak of inflationary pressures that began last year and is sped up by spiking energy prices changes the mix for central banks everywhere. In the past there was a quick response from central banks to signs of economic weakness. Interest rates were lowered and liquidity boosted by an increase in money supply.

The spike in global inflation now means central banks are no longer able to act like the economic cavalry.

Central bankers fear inflationary spirals more than recessions. If inflation shows signs of getting out of control they will stomp on the monetary brakes. Interest rates go up, and liquidity drops. At first, stocks may react positively to the signs of stronger growth, but the costs of fighting inflation favour a fall to a lower base-case valuation for markets generally.

That’s why this week’s inflation reads are so important to the outlook. China’s release of inflation and PPI data on Friday is likely to show a relatively benign inflation, with forecasts centred around an annual inflation rate of 1.1%. This is unlikely to move markets given the lower outright level of inflation.

Things kick off on Thursday night with the release of GDP data. As part of the calculations, analysts use a deflator known as the PCE to adjust growth estimates. In the past the US Federal Reserve has zoomed in on the PCE as its preferred inflation indicator.

This data is for Q4 2025 and the month of February. In other words, it will NOT reflect the impact of the Middle East conflict. However the data on Friday night is for the month of March. These two releases combined will give an accurate read on the impact of the oil price spike, and other price pressures, caused by the war with Iran.

Consensus estimates point to an increase in the headline rate to 3.1%, from an annual 2.4% the previous month. Expectations point to a similar acceleration at the core level, from the previous 2.5% to 2.7% pa.

This trend is concerning, and a key reason interest rate traders in the US have removed any rate cuts from their pricing. This sets up a potentially large market reaction to the release on Friday night (at the US open, 11.30 pm AEST). A much lower than forecast read on inflation could send shares soaring as investors re-factor potential interest rate reductions.

A big surge in inflation could bring the opposite reaction, as investors start pricing possible interest rate increases in the US. Looking at the charts, the $NASDAQ 100 Index (.NDX.US)$ is poised at an inflection point. While it holds above 24,000 the technical outlook is positive, but a slip below 24,000 could signal another leg down in the sell-off.

337

647K Views