Stock markets face inflation test

The sun has barely stopped shining on investors this summer. This week is off to another cheery start, with European and Asian stocks edging higher. The coming days will bring several tests, however - not least around inflation.

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Consumers under pressure

In the US, retail giants Walmart, Target and TJX are poised to publish financial results on Wednesday and Thursday. These reports will mark the end of earnings season and should give a hint of how American consumers are feeling.

Investors will be looking for fallout from the Middle East conflict. Are households still splashing out, or becoming more selective about what they buy as prices rise? Data from last week wasn’t particularly upbeat: oil prices edged higher, while US retail sales in July fell unexpectedly.

Consumer spending is a huge engine of the American economy, so weakness at the tills rarely stays there.

UK shoppers will be in the spotlight on Friday, when retail sales data for July is due. Before then, investors have UK inflation figures to look out for. Inflation fell by more than expected in June to 2.6%, but July numbers are expected to be higher - roughly 2.9% - due to the higher price cap on household bills.

A hotter reading could make further interest-rate cuts less likely - potentially lifting bond yields and putting more pressure on homeowners with mortgages.

So that’s the UK and US. In some ways, however, Europe is the most interesting story this summer. Over 80% of European companies have now reported their results, and the region is on track for one of its strongest earnings seasons in years. The energy sector is leading the charge, but technology and real estate companies are also posting healthy growth.

Enthusiasm for European equities is rising as a result and - unlike earlier this year - investors are not simply wary of US stocks or making a concentrated bet on the region’s defence sector.

Interest rate clues

Interest rates will also be centre stage this week.

On Wednesday, the Federal Reserve will publish notes from its July meeting, when it held rates at 3.5-3.75%. These could attract even more attention than usual as markets try to gauge the mood of new Federal Reserve chair Kevin Warsh. Warsh has scrapped so-called forward guidance, making it harder to know what the central bank is thinking.

Last Friday, markets scaled back their bets on a September rate hike to around 30%, from 50% earlier in the week. 

• Read: Where next for interest rates?

Japan is also attracting attention - particularly since the US took the unusual step of intervening to support the yen earlier this month. The Bank of Japan is expected to raise rates in September, and inflation data on Friday could make this more likely.

So, there is plenty to keep investors occupied as August rolls on. The key question is whether markets can keep shrugging off concerns about the Middle East conflict and inflation more widely - or whether clouds will eventually gather overhead.

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