The Week Ahead: Markets look to PMIs and inflation expectations reaction to Middle East conflict

The war in the Middle East is the primary driver for market moves but there are some important data releases that will indicate the economic impact already taking place. Investors are hoping for an off-ramp to the conflict but recent escalation – as Iran and Israel struck at energy infrastructure – pointed to a prolonged impact on crude and gas prices, and knock-on effect on inflation and growth.

Here’s the key events to watch over the next week.

Flash PMIs – Tuesday sees the flash PMI data released for the world’s major economies, the first real insight into how businesses have been impacted by the war in the Middle East.

Key within the data will be the expectations for inflation with the war having a direct impact on energy prices. Markets will be sensitive to inflation expectations derived from the PMIs.

In the UK, the PMI data had recently been signalling an uptick in business activity before the war in Iran. 

In the US, PMI data has been signalling a slowing in growth and rising inflation. Recent PPI inflation suggests inflation is already trending up before the war.

Europe’s sensitivity to energy markets means we could see its manufacturing-led recovery could be snuffed out.

Wednesday sees the release of UK CPI inflation data. Although this report shows the data from February – before the onset of conflict in the Middle East – it will nevertheless be an important component in the market’s assessment of where inflation is headed and could inform expectations for whether the Bank of England is preparing to raise rates in April after it signalled a willingness to control inflation. UK bond yields have shot higher since the war began on expectations that higher energy prices will result in a sustained rise in inflation.

Thursday sees the release of Japanese inflation data, which had been trending lower before the onset of the Middle East war. Weekly unemployment claims data from the US will also be watched for signs of whether the labour market is shifting due to the war. German consumer confidence and Italian business confidence surveys are expected to show a downturn. Norway’s Norges Bank may signal a rate hike is on the way.

We’ve already seen the Reserve Bank of Australia hike rates due to rising energy prices and markets have started to price in more rate hikes by other central banks, so the PMI data and inflation reports will be crucial to how the market sees the policy response from central banks.

Finally, Friday we get a barometer of consumer health from the US and UK. The UK’s GfK consumer confidence report – likely to show a decline following the rise in prices from the war. UK retail sales figures – turning sharply positive in January – are due for the month of February. In the US, market attention shifts to the University of Michigan inflation expectations and consumer sentiment surveys – providing a snapshot of how US consumers are feeling since the war started in the Middle East.