Economic data set to be announced over the next couple of days may reveal just how difficult a summer markets are going to experience. The message of recent weeks seems to be that investors are concerned that rising inflation numbers will cause the Federal Reserve to keep increasing interest rates, in spite of signs that the US economy is slowing.

Tuesday’s producer prices index will give some indication of the inflationary pressures in the US economy but the main focus of interest will be on Wednesday’s consumer price numbers, and in particular the core data. A lot could depend on rounding in the numbers; while a 0.3 per cent monthly increase in the core data would alarm the markets, 0.2 per cent would be reassuring.

The rather baffling use of owner equivalent rents as a measure of housing inflation only complicates the issue. Capital Economics estimates that this OER component could cause core inflation to hit 3 per cent (from April’s 2.3 per cent) by the end of this year.

However, it is a good rule of thumb that the more worried investors are about a piece of data in advance, the greater the likelihood of a rebound in prices when their worst fears are not realised.

Ian Scott, a strategist at Lehman Brothers, says the sell-off in stock markets has been overdone. “Global equities may now be close to a bottom. The large volumes traded over the last few days may indicate some squaring of positions. In other words, the deleveraging may be close to an end.”

Although the focus of fears has been the US economy, it is emerging markets that have suffered most. “The Fed has upped the ante at the worst possible time,” says Graham Turner of GFC Economics. “Previous experience has shown that a sustained rise in US rates has tended to be a major factor precipitating emerging markets. Interest rates are climbing in a number of vulnerable countries.”

And Bijal Shah of Société Générale warns that “the price-to-book [ratio] of Asian equity markets is still comparable to levels reached in 1999 at the height of the tech boom. And the bad news on sales and profit growth has yet to come.”

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