Cautiously higher

European stock markets are continuing cautiously higher on Thursday as we await key inflation data from the US and comments from BoE Governor Andrew Bailey.

Inflation and central banks’ response to it remain front and centre in investors’ minds and while the situation has not improved in recent weeks, there has been a clear upturn in sentiment. Earnings season came at just the right time and while there have been bumps in the road, investors will reflect on it positively and it’s certainly helped to lift the mood.

I think we’re also seeing investors come to terms with the higher interest rate environment that lies ahead. Of course, there will be a tipping point if markets are forced to price in even more rate hikes but there does now appear to be a level of comfort at the prospect of four or five increases this year from the Fed.

And if that does prove to be over the top in the coming months, it should provide a nice tailwind for stock markets as we move into the middle of the year. Investors will be looking for any sign that price pressures are easing as we near what many believe to be peak inflation over the next couple of months.

Today’s CPI from the US is what we’ve all been waiting for this week. Fed policymakers have continued to stress their flexibility on interest rates this year, with Loretta Mester claiming that each meeting will be in play, as many now assume to be the case. Although one hike each quarter still looks like the most likely outcome.

Of course, that depends on inflation not spiraling out of control, forcing the Fed to be more aggressive. The CPI data is expected to show prices rose 7.3% in January compared to a year ago, almost four times the Fed’s target. Another reading above here could spook the markets once more, which may explain the cautious advance we’re seeing so far today.

Can Bailey pare back market expectations?

The Bank of England is also on a journey to higher interest rates, although we are seeing some push back against market expectations. Four hikes are heavily priced in this year, including one at each of the next two meetings. Both of these are fully priced in after four dissenters voted for a 50 basis point move this month.

We could get more clarity from BoE Governor Andrew Bailey this morning when he appears at an online event hosted by TheCityUK. The suggestion last week appeared to be that in the near term, we will see rates rising, in line with what markets are saying, but beyond that, the pace of tightening will slow again, which does not align with markets. We may see that message reinforced this morning.

Bitcoin is a little lower and continuing to see strong resistance around USD 45,500 in the middle of the week. What’s encouraging is that we’re not seeing any real pullback from these levels though which suggests there’s plenty of enthusiasm. It would appear there’s a growing belief that the worst is behind it and we’ve all seen before what cryptos can do once they have some momentum behind them. A break of USD 45,500 would be very bullish, with USD 52,500 potentially offering the next test.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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