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Inflation and rate hikes…and then recession? No one can say for sure but it’s sure to mean volatility for the rest of the year as investors try to figure whether they want to own risk or not. The narrative of a Fed hellbent on defeating inflation is not one that will make for calm price action and steady gains. The bear is still in charge.

Markets are still dealing with the fallout of the hawkish comments from Jackson Hole last week, with no let-up in the jawboning. NY Fed president John Williams backed up Jay Powell’s remarks last week with the following: “We’re going to need to have restrictive policy for some time … this is not something we’re going to do for a very short period and then change course.” The comments are in harmony with Powell last week, who really pushed back against the idea that the Fed would hike hard and then immediately need to start cutting rates due to slowdown/recession.

German inflation rose to a 40-year high 8.8% in August…markets are raising bets the European Central Bank will take a more aggressive path towards normalisation than has previously been evident. ECB’s Muller said the central bank should discuss a 75-basis-point rate hike in September…but the risk of an energy crisis means the ECB is likely to prefer to take a slower approach….or is it? The ultimate risk from the ECB’s caution is inflation expectations become unanchored – higher for longer. The Fed is the example here in terms of seeking to do ‘whatever it takes’ to tackle inflation. I remain unsure if the ECB has the cajones to do the same. This morning data shows German import prices were up almost 29% in July. EURUSD holds just above parity. French EU-harmonised inflation slowed to 6.5% in August from 6.8% in July, a welcome relief for many, not least the ECB.

Eurozone CPI flash estimates are the highlight for this morning’s session at 10am (BST) – big questions hanging over what the ECB does this month so this reading is very important. Later sees the Chicago PMI, ADP payrolls and we hear from the Fed’s Mester. Earlier, China’s official manufacturing PMI contracted for a second month.

Wall Street declined for a third straight day on Tuesday. The S&P 500 now under its 50-day moving average, where it’s traditionally negative. The last time it fell below this level was back in April, which preceded a roughly 15% decline.

European stock markets are mildly higher this morning seeking to end a sluggish month on a positive note. Scores on the doors: The FTSE 100 is down slightly less than 1% in August, whilst the DAX and CAC are both off by almost 4% this month. The S&P 500 is down -3.5%, the Nasdaq –4% and the Russell 2000 –1.5%, in rough terms. YTD: London flat, Frankfurt –18%, New York (S&P 500) -16%. A terrible year so far for global stock markets – perhaps the worst in half a century – but the FTSE 100 is holding up and retaining value for investors remarkably well – a weak pound providing cover of course.

Sterling is trying to hold the line but there is not a great outlook here and calling the bottom will be tricky. Recession vibes from GS in yesterday’s well-circulated note that warned inflation could top 22%…PM hopeful Rishi Sunak is also out warning that rival Liz Truss’s policies could harm confidence in UK markets. No let up this morning as BRC says food price inflation rose to 5.1%, the highest since 2008. After hitting a fresh two-and-a-half year low at 1.1620 yesterday, GBPUSD is only slightly higher at 1.1660 this morning.

Oil: sharp reversal yesterday with WTI crashing off its 50-day moving average at $97 back to $92. Imminent death cross.

Gold: Testing support at the old haunt of $1,720 after the failure of the bulls to push through the 78.6% retracement at $1,760. MACD is bearish.

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