A Day Ahead View in US and Global Markets by Mike Dolan
World stock markets recorded new records and the dollar experienced its worst day of the year, as fears of an overheating US economy dissipated – fueling hopes that the situation is finally opening up to Federal Reserve easing .
Although markets rallied on Tuesday, the slightly weaker U.S. consumer price inflation report for April and plenty of encouraging details under the hood supercharged the S&P500 and Nasdaq to all-time highs and dragged Treasury yields to the level lowest in more than a month. .
Futures maintained these moves overnight as Asian stocks were also drawn into the maelstrom – helped by relief from the dollar’s biggest one-day drop in 2024 on Wednesday.
At the heart of the recent excitement on Wall Street has been the impact of volatility in equity and bond markets to their lowest levels in four months and six weeks, respectively.
The decline in monthly CPI gains last month is a cause for considerable relief after three months of sticky price gains – with easier services measures and shelter inflation of particular importance to the cautious Fed. Underlying and headline annual inflation as measured by CPI fell to 3.6% and 3.4%, in that order.
While a notable policy slump, Chicago Fed chief Austan Goolsbee welcomed the pullback in housing inflation in particular. “I’m optimistic that we will continue on this downward trajectory,” he said Wednesday night.
Two 25-point Fed rate cuts are back on the futures list for this year, with a first move almost fully priced in September and even a one in three chance now that the Fed could cut as early as July.
A surprising stagnation in retail sales growth last month, lower-than-forecast housing indicators for May and a larger drop in New York manufacturing sentiment this month also tempered the growth picture – and the combination dragged down the GDP growth estimate by Atlanta Fed real time back to below. 4%.
The US economic surprise index is still at its most negative level since January 2023.
Along with today’s industry reading, markets will now closely watch Thursday to see if last week’s outsized jump in weekly jobless claims holds true.
Stimulating global markets in general is the fact that the easing of inflation in the US – and the sharp contraction of the dollar – solidifies expectations that the European Central Bank will cut rates next month, and money markets also place a probability greater than 50% of the Bank of England easing in June as well.
Highlighting the much more moderate inflation picture in the euro zone – where annual CPI inflation is just 2.4% – Italy reported on Thursday that its annual inflation rate fell below 1% last month.
As for overall global growth, Japan surprised with news of a deeper contraction in economic activity in the first quarter than expected. The local economy shrank 2.0% in annualized terms between January and March from the previous quarter, faster than the expected 1.5% drop, as the weakening yen hit consumption.
But the weak growth reading may dispel speculation of another imminent tightening by the Bank of Japan in that country.
Back on Wall Street, the rally in stocks was widespread across all tech megacaps and small caps following a season of bumper profits.
Walmart will report later on Thursday, but many will already be looking to artificial intelligence as a benchmark for Nvidia’s update next week.
In company news, Netflix said on Wednesday that its ad-supported tier reached 40 million global monthly active users, up from 5 million a year earlier, a sign that its effort to attract new users with the cheapest plan is worth.
Main daily items that could guide US markets later this Thursday:
* US weekly jobless claims, April industrial production, April import/export prices, April housing starts, May Philadelphia Fed business survey
* US Corporate Profits: Walmart, Deere, Applied Materials, Copart, Take-Two Interactive Software
* Federal Reserve Vice Chairman for Supervision Michael Barr testifies at Senate Banking, Housing, and Urban Affairs Committee hearing; Cleveland Fed President Loretta Mester, Philadelphia Fed Chief Patrick Harker, Richmond Fed Chief Thomas Barkin, and Atlanta Fed Chief Raphael Bostic all speak; Bank of England lawmaker Megan Greene speaks
* US Treasury sells 4-week bonds
(Reporting by Mike Dolan, Editing by Sharon Singleton mike.dolan@thomsonreuters.com)
