A Day Ahead View in US and Global Markets by Mike Dolan
Fueled by stunning disinflation and a growing list of interest rate cuts from central banks around the world, global stocks and bonds are rallying again – with today’s US consumer price update set to clean up laying the groundwork for Fed easing next month.
Helped by a benign producer price reading and the VIX volatility indicator falling below its 30-year average, Wall Street indexes rose again on Tuesday and futures maintained their movement ahead of the CPI report.
With overall U.S. producer price inflation falling more than expected in July, the most striking element of Tuesday’s report was the biggest drop in the cost of services in almost a year and a half and clear signs of a decline in pricing power.
As services inflation has irked the Federal Reserve for months, the latest development is an impact – along with other elements of the PPI that feed into the Fed-favored PCE indicator also behaving.
With today’s CPI expected to post modest monthly gains of 0.2% at the global and “core” levels, and with multiple measures of inflation expectations dissipating again, futures appear comfortable pricing up to 107 basis points of Fed easing for the rest of the year.
Although typically hawkish Atlanta Fed chief Raphael Bostic said Tuesday he wants to see “a little more data” before backing a cut, he will likely get that done before the September meeting.
Two-year Treasury yields fell below 4% and 10-year yields fell to 3.84%. The dollar fell, with the euro reaching its best levels of the year in relation to the dollar, with GDP growth in the bloc’s second quarter reaching 0.3%.
With inflation declining and Fed cuts looming, the overall economy seeing real growth of nearly 3%, and annual corporate profit growth approaching 14%, it’s a bullish outlook for stocks. and both the S&P500 and Nasdaq added more than 1%.
Adding to the global easing party on Wednesday, the normally aggressive Reserve Bank of New Zealand surprised with its first rate cut in more than four years and said inflation was returning to its target. The Kiwi dollar was jolted back.
The decision by one of the first to adopt inflation targets will have repercussions beyond New Zealand markets.
And there was also enthusiasm for inflation in Britain.
Although annual CPI inflation in the UK rose for the first time this year after two months of impact on the 2% target, the increase to 2.2% was smaller than expected and inflation in the services sector continued decreasing.
The British pound fell after Tuesday’s strong rally.
European and Asian stocks rose broadly on Wednesday – with Japan’s Nikkei and the yen shrugging off news that unpopular Prime Minister Fumio Kishida will step down as ruling party leader in September after three years in power .
Once again, mainland Chinese stock indices underperformed and closed almost 1% in the red and at their weakest level in six months. Tuesday’s weak economy-wide lending data unnerved investors once again.
There was better news for recently revived technology stocks heading into the upcoming earnings season.
Apple supplier Foxconn beat expectations with a 6% rise in quarterly net profit due to booming demand for AI servers and maintained its forecast of significant full-year revenue growth.
On the other hand, Bloomberg reported that the US Department of Justice is considering options that include breaking up Alphabet’s Google – a week after a judge ruled that the technology giant illegally monopolized the online search market.
Shares of the California-based company were down about 1% before the bell today.
Meanwhile, UBS gained almost 2% as Switzerland’s largest bank reported a net profit of $1.14 billion in the second quarter, comfortably beating analysts’ estimates.
Key developments expected to provide further guidance to US markets later on Wednesday:
*US July consumer price index
* US Corporate Profits: Cisco Systems, Progressive, Cardinal Health
(Edited by Bernadette Baum)
