The moment we've been waiting for

Stock markets got the week off to a strong start and that optimism is carrying through to the inflation report release, it would appear.

European indices are trading around half a percentage point higher early in the day and US futures indicate a slightly positive open as well. Of course, all of that will probably change between now and the opening bell, with the inflation data being released an hour before.

As was the case yesterday, I'm quite surprised at the level of optimism we're seeing in the run-up to the report. The inflation data has a lot of heavy lifting to do in order to alleviate clear concerns over the tightness of the labour market. The January report has heaped more pressure on the CPI to deliver and forecasts are not that hopeful. Time will tell whether investors have been a little bit complacent on this one.

A concerning wage number for the BoE

UK watchers may be feeling a little less optimistic this morning after labour market figures showed wages excluding bonuses rising once more in December. They were expected to stay flat at 6.5% but instead jumped to 6.7%, a level still far below headline inflation and not consistent with it falling back to target any time soon.

Including bonuses, the number was a slightly more modest 5.9% which is still too high but at least a deceleration from the month before. Following the release, UK yields were given a nudge higher, lifting the pound in the process alongside expectations on the terminal rate which is now seen hitting 4.5% and probably not falling this year.

Paring gains

Oil prices are falling again on Tuesday after initially recouping losses at the start of the week. While traders remain very optimistic about China and to a lesser extent, the resilience of the global economy this year, the fact remains that it won't be a smooth process, and that has already been evident in the economic data in the opening weeks of 2023.

It will be interesting to see how oil prices respond to today's US inflation data as interest rates are now at a point where every 25 basis points matter and could be the difference between a soft landing and a recession. Equity markets don't appear to be fully capturing that at the moment but oil appears to reflect that much more.

Awaiting the inflation release

Gold remains choppy in the lead-up to the inflation report. It was starting to drift lower again late last week but that appears to have slowed, probably with an eye on today's release. A strong inflation reading could weigh heavily on the yellow metal and intensify the second wave of the correction.

While it has seen some support around $1,850 this past couple of sessions, the interesting levels remain $1,820-$1,830 and $1,780-$1,800. Another weak inflation print could draw an abrupt end to the correction and see gold rally once more, at which point $1,890-$1,900 may provide the initial test.

All hangs on CPI

Bitcoin has also consolidated in the run-up to today's inflation number. This ultimately becomes a case of whether markets go into risk-on or risk-off mode following the release. It has entered into a corrective move but that's unlikely to continue if today's inflation print falls short of expectations again.