US inflation dominates sentiment, with headline CPI likely to head lower

• UK jobs data sees both earnings and claimants fall short of expectations.

• US inflation dominates sentiment, with headline CPI likely to head lower.

• Crude demand outlook from IEA and OPEC helps lift WTI.

European markets are tentatively higher as traders overlook a somewhat worrying jobs report to focus on the impending inflation data due out in the US. The latest UK employment numbers saw total average earnings remain stubbornly high, with the September figure of 7.9% standing well above the 7.2-7.4% zone expected by markets. This has obvious implications for inflation, although those fears are likely to be allayed by a sharp decline in UK CPI tomorrow. On the positive side, the uptick in October claimants proved to be less notable than many had predicted, with the steady unemployment rate similarly easing fears that we are seeing signs of economic distress in the UK. With claimants on the rise, and average earnings headline lower, there is a case that we are exhibiting the kind of soft landing and disinflation the BoE have been trying hard to manufacture.

Looking ahead, the US inflation reading looks set to dominate sentiment as traders attempt to gauge whether the Fed are done or due another one. The decline in energy prices over the course of October should help drive down this metric, with the 0.1% expected marking a significant shift from the 0.4% and 0.6% seen in September and August. Crucially, we look to see headline CPI return to the disinflation trend seen in the first half of 2023, with markets likely to celebrate the reversion back on course after three-months of higher or flat CPI. While there has been some concern over the impact from new calculations over health insurance and how that could provide a short-term boost to inflation, there is also a feeling that last month’s jump in rental prices should reverse and work alongside energy to drive down CPI inflation today.

Crude oil prices are consolidating after yesterday’s boost in the wake of the OPEC report which raised their oil demand outlook, noting that Chinese and US demand was not falling to a concerning extent. The impact of energy prices on inflation will be evident today, with the US CPI likely to be driven lower thanks to the WTI weakness seen last month. Today’s IEA upgrade to their demand forecast for 2024 brings additional fuel to the bullish crude story, although the price of crude has remained stable as the demand upgrade is balanced against the expectation of record supply in 2023 and 2024.