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The specter of stagflation clouds Fed's optimism

Kevin Buckland gives us a look at what the future holds for European and global markets.

The market is optimistic about monetary policy. Rising equity prices and falling bond values are a good indicator of this. A rate cut next week at the Fed meeting has a decent chance to be a big one.

Wall Street closed with new record highs over night, Taiwan's benchmark has reached a new peak and Japan's Nikkei index is moving back to Tuesday's unprecedented level.

The unquestionable weakness of labour market indicates that policy easing will be imminent.

The question is, however, how much the Fed's rate cut trajectory is complicated by the still-sticky inflation. Markets will receive two crucial days of data, namely PPI today and CPI the following day.

The Fed would be forced to take a risky course of action if inflation levels were high.

The market currently has 66 basis point of easing priced for the end of the year, with 7% odds on a 50 basis-point cut coming next Wednesday.

The Fed is still the most important story on the global markets, but European investors should keep an eye on the geopolitical situation after NATO member Poland shot down for the first time apparent Russian drones it claimed had infringed on its airspace when it launched an attack against western Ukraine.

French politics is also a major topic. The deeply unpopular President Emmanuel Macron has named Sebastien lecornu, a 39-year old loyalist, as his fifth Prime Minister in less than two-years, raising the question of just how long either of them can hold on to power.

The outcome of ECB’s two-day summit that begins today is now more certain. Economists are almost unanimous in their expectation for rates to remain unchanged. The ECB's two-day meeting that begins today is more certain, with economists almost unanimously expecting rates to remain steady.

The following are key developments that may influence the markets on Wednesday.

US PPI (August).

-Sweden monthly GDP (July)

-Norway, Denmark CPI (both August)

Italy, Spain, Greece Industrial Output (all July).

(source: Reuters)