(Reuters) – A view of the day ahead at Dhara Ranasinghe markets.
We are back to the markets versus the US Federal Reserve.
Although the central bank on Wednesday delayed the start of rate cuts until perhaps December, markets (and many economists) disagree.
Traders rate a probability of about 65% of a quarter-point move in September and more or less fully factor in a move at the November meeting – which takes place two days after the US presidential election.
The latest inflation numbers offer some explanation as to why markets are ignoring the Fed’s own view when a first rate cut is likely.
US consumer prices were unexpectedly unchanged in May – a sign that price pressures are easing, even though global annual inflation is still high at just above 3%.
Most economists continued to expect two rate cuts starting in September, arguing that inflation had turned the corner after rising in the first quarter.
So world markets have – it seems – chosen to follow the lead of the inflation data, released just hours before the Fed’s monetary policy statement, rather than the Fed’s messaging.
To be fair, though, Fed policymakers have said – once or twice – that they will react to incoming data.
Stock market futures point to a positive start for Wall Street, a day after the S&P 500 and Nasdaq posted record closing highs for the third day in a row.
US Treasury yields are higher, but only modestly.
For some, signs of falling inflation could be a positive sign for large swaths of the stock market that have languished in a Big Tech-led recovery.
Yes, the S&P 500 is up about 14% this year, but about 60% of the return has been driven by six companies whose shares have an outsized weight in the index: Nvidia, Microsoft, Apple, Meta Platforms, Alphabet and Amazon. com, data from S&P Dow Jones Indices showed.
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However, global trade tensions are likely to remain in focus.
Beijing hopes the European Union will reconsider tariffs on Chinese electric vehicles (EVs) and stop going further in the “wrong direction” to protect its auto industry from competition, state news agency Xinhua said.
The EU measures, announced on Wednesday, come less than a month after Washington revealed plans to quadruple tariffs on Chinese EVs to 100%.
Beijing rejected the EU and US argument that China’s electric vehicle industry is running at a degree of overcapacity that threatens foreign carmakers through subsidized exports.
Unsurprisingly, given the uncertainty, European auto stocks fell 2% on Thursday, but major Chinese electric car makers such as BYD recovered.
Meanwhile, Group of Seven (G7) leaders will begin their annual summit with the aim of bolstering support for Ukraine in its war with Russia and offering a united face in confronting China’s political and economic ambitions.
Also in Europe, the spotlight fell on Britain’s campaign for the July 4 national elections, with main opposition Labor leader Keir Starmer ready to reveal his party’s agenda for government. Opinion polls suggest that the Labor Party will win the election.
Key developments expected to provide further guidance to markets on Thursday:
– Bank of Japan begins two-day meeting
– US May PPI
– Auctions: 30-year US bonds
(Reporting by Dhara Ranasinghe; Additional reporting by Alun John; Editing by Gareth Jones)
