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Daily market newsletter: 14th June 2006   

Markets braced for US inflation data

The Tuesday US producer price data recorded a lower than expected headline increase of 0.2% for May while the underlying rate was slightly above market expectations at 0.3%. The core data will certainly maintain inflation concerns, but should not intensify fears at this stage.

The consumer inflation data will be watched closely on Wednesday with the dollar and the wider financial markets very sensitive to the core rate. The margins are very small and the importance should not be over-stated. Given the impact of rounding, for example, a rate of 0.255% would be rounded up to 0.3%, increasing inflation fears while a rate of 0.245% would be rounded down to 0.2% and offer near-term market reassurance.

Nevertheless, the figure will still have a very important short-term market impact. A monthly rate of 0.3% or higher would reinforce expectations of higher US interest rates while a rate of 0.2% or lower would calm inflation fears and a figure below 0.1% could weaken the dollar sharply. The wider implications will also be important as a high US inflation figure would be likely to result in fresh emerging-market stress and lead to further sharp losses for global stock markets.

Markets will also look at the Fed’s beige Book and Fed comments on interest rates over the next 24 hours to gauge June’s FOMC decision.

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