U.S. stock futures inch up ahead of CPI data that could show inflation at 40-year high

The S&P 500 has lost 83.82 points, or 2.1%, over the last three trading days.

What’s driving markets

The U.S. corporate earnings season kicks into gear on Thursday, but for now inflation, in the shape of the June consumer price index report, is the focus for traders.

Stocks have endured a miserable year to date, with the benchmark S&P 500
SPX
down close to 20%, battered by persistent inflation concerns and other headwinds.

“Heading into CPI and earnings, after markets had climbed a wall of worry since mid-June, they seem to be losing a bit of footing again over the last few days as fears of a recession dominate again, alongside fears of aggressive rate hikes by central banks, rising Covid cases in China and the prospect of Russia cutting off Europe’s gas,” said Jim Reid, market analyst at Deutsche Bank.

The International Monetary Fund on Tuesday warned that a surge in inflation poses “systemic risks” to the U.S. economy, a concern not lost on the Federal Reserve as it seeks to damp rising prices by sharply raising borrowing costs. The Fed’s tighter policy trajectory has removed liquidity from the market and helped pressure equity valuations.

The CPI report, due at 8.30am Eastern, is expected to show year-on-year inflation of 8.8%, up from 8.6% in June.

“Remember that it was last month’s much stronger-than-expected report that sparked a tumultuous market reaction that culminated in the Fed moving by 75bps at a single meeting for the first time since 1994, having previously only signalled a 50bps move. So any further surprises today could have a big impact,” Reid told clients in a note.

Market anxiety is elevated ahead of the data. The CBOE Volatility Index
VIX,
a gauge of expected S&P 500 volatility, was trading at 27.42, off recent highs but well above its long term average around 20.

“A further rise in the U.S. consumer prices will certainly revive the Fed hawks today, push the U.S. dollar higher and equities lower. A softer-than-expected figure, on the other hand, could…result in a much-awaited pause in the dollar rally, and a rebound in equities before big US banks start releasing their quarterly results on Thursday,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, told clients in a note.

“In both cases, the market volatility will likely remain high, and the visibility likely remain low especially when you add the lower summer trading volumes into that mix,” she added.

Other markets

• Bourses across Europe mostly followed Wal Street’s overnight retreat, leaving the Stoxx 600
  XX:SXXP
  off 0.6%.

• The U.S. 10-year Treasury yield
  BX:TMUBMUSD10Y
  fell 2.3 basis points to 2.953% as the risk aversion evident in U.S. stock futures encouraged flows into sovereign bonds.

• The dollar slightly firmer versus the yen
  USDJPY,
  but softer against the euro
  EURUSD,
  which was steady after nearing parity in recent sessions. The ICE Dollar Index
  DXY
  was holding near its highest level in nearly 20 years.

• WTI crude
  CL
  added 1.3% to $97.09 a barrel having lost 8.5% over the previous two sessions on fears slowing economic growth would hit demand.

• Gold
  GC00
  was steady at $1,725 an ounce and Bitcoin
  BTCUSD
  was higher at around $19,686.