A look at the day ahead at the US and global markets from Mike Dolan
Investor relief that continued disinflation in the US eases pressure on the Federal Reserve to resume its 14-month rate hike campaign remains dampened by debt ceiling concerns.
As economists argue back and forth over the runes of April’s US consumer price report, the main takeaway was that headline inflation unexpectedly fell below 5% for the first time in two years. And the financial markets reacted accordingly.
Some elements of the report, such as an increase in previously subdued commodity price inflation, will keep the Fed on its toes. On the other hand, as Deustche Bank points out, the monthly ‘core’ inflation rate was the lowest since February 2021 – if you exclude lagging shelter and used vehicle components.
Perhaps something for everyone. But the result of pricing Fed futures was that the probability of a rate hike in June was reduced to just 4% and the probability of an easing by the end of the year increased to 75 basis points.
The Treasury market’s two-year break-even inflation expectations are now back below the Fed’s 2% target. Yields on two-year government bonds fell back to just 3.9%, Wall Street stocks posted a technology-led rally and futures are back up ahead of Thursday’s open. The dollar held up.
Is the legendary ‘soft landing’ in sight? Or are the markets assuming too quickly?
With a year-over-year decline in crude oil prices still hovering around 30%, that relatively favorable picture is unlikely to be disrupted by US producer price inflation data expected later Thursday, with forecasts for a decrease of that total percentage to 2.4. % of 2.7%.
And whatever happens to China’s post-COVID economic recovery, it’s not generating inflation there.
China’s consumer and producer price inflation for April were both below forecasts – the former rose by barely 0.1% and at its slowest pace in more than two years, and the latter fell by the fastest drop since the depths of the 2020 pandemic .
With investors eyeing another round of monetary easing in China, the offshore yuan fell.
The scenario is very different in Britain, where the most recent double-digit inflation reading is now twice the prevailing US rate and the Bank of England is expected to proceed with another quarter-point rate hike to 4.5% on Thursday. Markets then price in two more increases.
But investor relief continues to be dampened by the US debt ceiling deadlock, which threatened to dominate the meeting of G7 finance leaders underway in Japan on Thursday.
With the next formal meeting between the White House and Congressional officials on Friday, the market jitters were most apparent in the short-dated Treasury market. At 5.7%, the interest rate on one-month bills remains about half a point higher than the Fed’s policy rate and the three-month interest rate is also rising, to 5.4%, despite the Fed’s expectations.
More broadly, stock market gains are primarily driven by Big Tech gains – with New York’s FANG+TM index (.NYFANG) of the 10 leading digital and tech companies rising another 1% on Wednesday and now as high as 43 % for 2023 so far, in part as artificial intelligence breakthroughs electrify the industry.
With 90% of S&P500 companies reporting their first quarter earnings, the overall annual earnings decline is just 0.6%.
Full calendar year 2023 earnings estimates for the S&P 500 have turned positive again – negative since the end of March.
However, there was a sting in the tail for Walt Disney stock overnight.
Disney said it cut streaming losses by $400 million from the prior quarter, but also lost subscribers, sending the company’s stock in after-hours trading down 4.4%.
Events to look out for on Thursday:
* April US producer price index, weekly jobless claims
* G7 finance ministers and central bankers meet in Niigata, Japan. US Treasury Secretary Janet Yellen speaks
* Bank of England policy decision
* Governor Christopher Waller of the Board of Directors of the US Federal Reserve and Pablo Hernández de Cos, Governor of the Bank of Spain speaking in Madrid
* US Treasury auctions 30-year bonds
* US operating income: News Corp, Tapestry, JD.com
By Mike Dolan, edited by Elaine Hardcastle mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.