Markets pray inflation stays well behaved
A look at the day ahead in U.S. and global markets from Mike Dolan
Off-radar for much of the past week's market turbulence, U.S. inflation updates this week will reveal just how much latitude the Federal Reserve has to meet pumped-up expectations around its first interest rate cut next month.
Helped in part by Monday's holiday in Tokyo - the epicenter of much of the recent volatility explosion - calmer world markets were barely recognizable from last Monday's wild ride.
With the S&P500 .SPX ending last week basically unchanged despite days of outsize swings, the VIX .VIX volatility gauge has returned close to long-term means around 20.
Worries about the U.S. labor market were soothed by falling weekly jobless claims and the aggregate corporate earnings picture remains robust, with annual profit growth for the S&P500 close to 14% through the second quarter with the reporting season now winding down.
What the wave of jobs anxiety and market turbulence has embedded however is bigger bets on Fed easing - with futures still priced halfway between a quarter- and a half-point cut next month and seeing 102 basis points of easing to year-end.
Whether the Fed has the confidence to go that far will hinge in part on inflation readings like those due this week.
Unusually, the producer price inflation report on Tuesday precedes the CPI update. The former should remain soft, with headline annual PPI expected to have run as low as 2.3% in July.
Monthly CPI readings of 0.2% should prove relatively benign for the Fed too, with "core" annual consumer price inflation forecast to have ebbed slightly to 3.2%.
In other words, there should be nothing to scare the horses if the number comes in on consensus - with even Fed hawks now acknowledging it's time to ease as long as disinflation continues.
"Should the incoming data continue to show that inflation is moving sustainably toward our 2% goal, it will become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive on economic activity and employment," Federal Reserve Governor Michelle Bowman said on Saturday.
Bowman, who until recently insisted another rate hike was still on the table, nudged back on bets of big rate cuts based on the July employment report alone, saying it may have "exaggerated the degree of cooling".
INFLATION EXPECTATIONS
Before we get to the week's CPI report, the New York Fed gives a glimpse on Monday of household inflation expectations as it releases its July survey. Median 3- and 5-year outlooks have recently slipped back below 3%.
And markets too appear to have lowered their inflation expectations during the upheavals of recent weeks.
Ten-year "breakeven" inflation views embedded in inflation-protected Treasury securities USBEI10Y=RR fell to within a whisker of the Fed's 2.0% inflation target last week - their lowest since early 2021. Although they have firmed a bit since, they're still only at 2.1%.
A green light for the Fed perhaps.
The quieter start to the week has Treasury yields US10YT=RR a fraction higher, though still below the 4.0% threshold breached over the past 10 days.
The dollar index .DXY was a touch higher.
Wall St stock futures ESc1 and European indexes were a touch higher.
Chinese mainland stocks .CSI300 underperformed, with much of the market attention there on big swings in the government bond market over the past week.
In deals, shares of BT Group BT.L jumped 6.6% after India's Bharti Enterprises agreed to buy around a 24.5% stake from the British telecommunication firm's top shareholder, Altice UK.
Key developments that should provide more direction to U.S. markets later on Monday:
* New York Fed's inflation expectations survey
* US Treasury sells 3 and 6-month bills
New York Fed chart on its consumer inflation expectations survey https://tmsnrt.rs/3ypGFCR
CPI vs. PCE inflation https://reut.rs/4d57U4k
CBOE Volatility Index https://reut.rs/4clQwYe
Yen positioning - leveraged funds https://reut.rs/3M6vRMN
Fund flows: Global equities, bonds and money markets https://tmsnrt.rs/3Jt3wjr
By Mike Dolan, editing by Alex Richardson
mike.dolan@thomsonreuters.com
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
