It’s quiet. Too quiet. Investors cut exposures ahead of this morning’s critically-important inflation print, leaving most major currency pairs unchanged in overnight trading. The dollar is modestly weaker, and the Treasury curve remains deeply inverted, with two-year yields exceeding their ten-year equivalents by almost 50 basis points – the most since 2000, and a sign that investors expect the economy to fall into a recession.

Markets expect inflation pressures to subside somewhat, with the headline measure rising 8.7 percent year-over-year in July, down from 9.1 percent in June. The core measure is seen rising to 6.1 percent from 5.9 percent in the prior month. This is unlikely to impact Federal Reserve policy directly – another report will land before the September rate-setting meeting – and from what we can observe, directional position-taking is almost non-existent into the release, meaning that market reaction could be surprisingly subdued.

But it’s only rational to expect the unexpected. Data releases have been telling confusing, often contradictory, stories about the economy for months, and markets have been repeatedly wrong-footed.

Chinese prices rose by less than expected in July, with the headline consumer price index increasing 2.7 percent year-over-year. Food prices climbed 6.3 percent, with a 12.9 percent surge in fresh vegetables and a 20.2 percent jump in pork costs doing much of the heavy lifting. Core inflation rose just 0.8 percent as consumer demand remained weak in the face of ongoing coronavirus lockdowns and a historic crackdown on the property sector.

Japanese Prime Minister Fumio Kishida shuffled his cabinet last night, but key pieces of tableware remained unmoved, negating any major implications for monetary policy. Chief Cabinet Secretary Hirokazu Matsuno and Finance Minister Shunichi Suzuki kept their jobs, making it likely that another monetary dove will be appointed to replace Haruhiko Kuroda at the helm of the Bank of Japan next year. The yen is clinging to the 135 mark, with movements in American yields providing most of the motive power for exchange rate shifts.

Oil prices are down again after a Hungarian refiner said it had transferred funds to the Druzhba pipeline’s Ukrainian operator. A sanctions-related banking issue, reported yesterday, had temporarily halted flows through one of Europe’s most important supply corridors. More volatility is ahead: the US Department of Energy is due to release its weekly inventory figures at 10:30 am, and traders will zero in on the implied gasoline demand category that triggered big moves last week. The Organization of Petroleum Exporting Countries and the International Energy Agency will release their monthly forecasts tomorrow.

Huw Pill will walk into a minefield later this morning. The Bank of England’s Chief Economist will participate in a question-and-answer session with the public around noon, and is likely to face difficult queries on how monetary policymakers have responded to inflation, where rates are going in the near term, how a recession might impact households, and whether politicians should change the institution’s core mandate – as Conservative leadership candidate Liz Truss has proposed. The pound remains on the defensive as investors brace for a period of seventies-style stagflation.