• Nikkei hits 34-year high at 38k.

  • UK jobs report helps drive sterling strength.

  • US inflation in view, with CPI expected to fall.

European markets are trading in the red this morning, with the optimism exhibited throughout the Asian session failing to carry through into the West. The Nikkei 225 continues to enjoy a year to remember, with the latest 2% rise taking the index up into a fresh 34-year high of 38,000. Nonetheless, the Lunar New Year ensures a general lack of Chinese influence this week, with traders instead looking closer to home for drivers of market sentiment.

Today’s UK jobs report represents the first of many major UK data points this week, with the pound seeing a sharp uptick in response to a higher-than-expected wage growth figure. Whilst inflation stands at 4%, the elevated nature of UK wage growth (5.8%) serves to highlight the continued underlying inflation pressures being felt by businesses. From a consumer standpoint, this represents another month of positive real wage growth, further correcting the decline in spending power particularly seen in 2022. From a monetary policy standpoint, the lower-than-expected claimant count and unemployment rate releases have helped build on the notion that the Bank of England can remain steadfast in their approach to driving down inflation for some time yet. All eyes turn to tomorrow’s inflation report, with forecasts pointing towards a potential increase that could once again bolster support for the pound over the near-term.

The inflation theme looks to kick off today, with US CPI data due for release in the afternoon. Coming off the back of a period that has seen the Federal Reserve consistently reigning in market expectations over the timing and scope of their 2024 rate cuts, today’s expected slide in US CPI could be a short reprieve from that trend. With the 0.5% reading from last January dropping out of the annual metric, base effects should help provide the basis for a welcome decline in inflation today. However, the wider picture remains problematic, with the pathway back to 2% looking far from simple.

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