Weekly market preview: ECB rate decision and U.S. CPI take centre stage

A relatively quiet week lies ahead, typical for the period following the NFP release. The week begins with bank holidays in the U.S. and Canada. Tuesday's schedule includes Japan's GDP quarter-on-quarter and Australia's Westpac consumer sentiment data.

Wednesday sees the U.S. ADP weekly employment change figures, with two simultaneous releases to cover the missed release from the prior week. Thursday features the European Central Bank's monetary policy decision, alongside U.S. producer price index month-on-month, jobless claims, and existing home sales data.

Friday is the key day, with the much-awaited U.S. inflation figures taking centre stage. Also due are the preliminary University of Michigan consumer sentiment index and its inflation expectations component. The Federal Reserve's semiannual monetary policy report is also set for release.

Australia's consumer sentiment index climbed 6.0% in August to 88.9. However, sentiment among consumers is still broadly pessimistic, as the ongoing Middle East conflict continues to dampen confidence.

Concerns over rising inflation have also led to expectations that further rate hikes could be on the table, which would further strain households. Simultaneously, the housing market correction has deepened, presenting another obstacle for consumers.

The European Central Bank is widely anticipated to increase its deposit rate by 25 basis points to 2.50% at its meeting this week. The rationale centres on robust third-quarter economic activity, persistently high headline inflation, and moderate wage growth.

Despite softer core and services inflation indicating that underlying price pressures are easing, elevated energy costs and the hawkish tone of the July minutes are expected to maintain caution among policymakers. According to Wells Fargo analysts, fuel prices are near their 2022 highs, and low gas storage levels render the Eurozone vulnerable to additional energy disruptions.

Given the growth risks, the ECB is not expected to respond forcefully to a shock that is limited to energy. Yet a wider increase in food prices could pose greater worries if it drives up inflation expectations. After September, the monetary policy trajectory will hinge on the durability of energy and food price pressures.

For the United States, the median forecast for core CPI month-on-month stands at 0.2%, matching the previous figure. The annual core CPI rate is anticipated at 2.4%, down from 2.5%. Headline CPI month-on-month is projected at 0.4%, up from 0.1% last month, while the annual headline rate is seen at 3.4%, unchanged. After a jobs report that beat expectations, focus shifts to inflation. Growing expectations of a September rate hike make this week's CPI data critical.

Core services inflation is seen rising about 0.2%, as higher travel and accommodation costs counterbalance weaker medical care and housing inflation. The report is projected to reveal that headline inflation continues to be affected by the Middle East conflict's effect on oil prices, while core inflation stays fairly moderate.