Markets await US inflation report

• Downbeat start in Europe.

• RBA hold rates with all eyes on the February meeting.

• Markets await US inflation report.

A downbeat start to the session in Europe has seen a sea of red in early trade, feeding off a mixed Asian session that saw Monday’s China-led stock market surge fade somewhat. However, ultimately it has been the influence of US equities which have played the most important role, with the Trump-trade showing signs of instability after a bumper post-election month. For all the talk of a Santa rally, the weakness seen throughout US stocks serves to provide a warning that we might see a pullback before any year-end surge can take place. After-all, US equities are valued to perfection, with the record highs taken place in anticipation of continued earnings growth.

The Australian dollar lost ground overnight following an RBA meeting that saw Governor Michelle Bullock announce a ninth consecutive rate pause. The decision to freeze rates this month came as no surprise, but the big picture was around the possibility of a February rate cut which now seems a distinct possibility. Nonetheless, with Bullock noting that upside inflation risks had eased but not gone away, markets will continue remain sensitive to any notable shifts in economic data.

With a relatively quiet economic calendar in place for the rest of the day, traders will undoubtedly be looking ahead to tomorrow's US CPI inflation report. Donald trump's victory may have ignited the animal spirits within financial markets, but it does also bring the risk of a resurgence in inflation pressures. Depressed energy prices have helped keep the headline inflation gauge under wraps for the most part, but we will be keeping a close eye out on the core CPI metric which hasn’t declined in four months now (currently 3.3%). Inflation remains a services-led issue, and while the recent collapse in the ISM services PMI gauge could lift hopes of a disinflationary move it is worthwhile noting the stubbornly high ‘prices paid’ element which rose to 58.2.