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Inflation Angst Could Roil Markets

Market volatility has eased in the lead up to today’s highly anticipated US CPI data. The VIX index has moderated closer to 20, which is notably below the mid-30s peaks it has witnessed on multiple episodes so far this year. The JPMorgan Global FX Volatility Index has also cooled below its 100-day moving average.

Still, this relative calm could be upended by today’s US July inflation print, where the median estimate for economists’ forecasts comes in at 8.7%. Although that would mark an easing from June’s 9.1%, it would still be more than four times higher than the Fed’s 2% target.

Markets are well aware that multi-decade high inflation remains the Fed’s number one enemy, to the point that policymakers are willing to crimp economic growth in the name of vanquishing scorching-hot inflation.

The headline CPI figure has shown a tendency to surprise to the upside, having done so in five of the past six releases. Yet another hotter-than-expected CPI print today could prompt risk assets to unwind more of their recent gains.

However, signs that US inflation has peaked may further embolden risk-taking activities in markets, on the notion that the Fed can start to walk back from more jumbo-sized rate hikes.

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