US clears inflation decks, NZ cut surprises
A look at the day ahead in U.S. and global markets from Mike Dolan
Feeding off impressive disinflation and a growing list of central bank interest rate cuts around the world, global stocks and bonds are rallying anew - with today's U.S. consumer price update set to clear the deck for Fed easing next month.
Helped by a benign producer price readout and the VIX volatility gauge .VIX subsiding back below its 30-year mean, Wall Street indexes .SPX, .IXIC roared higher again on Tuesday and futures held the move ahead of the CPI report.
With overall U.S. producer price inflation receded by more than forecast in July, the most eye-catching element of Tuesday's report was the biggest drop in the cost of services in nearly 1-1/2 years and clear signs of ebbing pricing power.
As services inflation has irked the Federal Reserve for months, the latest development packs a punch - along with other elements of the PPI that feed the Fed-favored PCE gauge also behaving.
With today's CPI expected to show modest 0.2% monthly gains at headline and 'core' levels, and multiple measures of inflation expectations dissipating again, futures seem comfortable in pricing as much as 107 basis points of Fed easing over the remainder of the year.
Even though typically hawkish Atlanta Fed boss Raphael Bostic said on Tuesday he wants to see "a little more data" before supporting a cut, he will likely get that before September's meeting.
Two-year Treasury yields US2YT=RR have plunged back below 4% and 10-year yields have retreated as low as 3.84%. The dollar fell back, with the euro EUR= hitting its best levels of the year against the greenback as second-quarter GDP growth in the bloc came in at an expected 0.3%.
With inflation on the wane and Fed cuts coming, the wider economy tracking almost 3% real growth and annual corporate profit growth running at close to 14%, it's a rosy picture for stocks and both the S&P500 and the Nasdaq added more than 1%.
Adding to the global easing party on Wednesday, the usually hawkish Reserve Bank of New Zealand surprised with its first rate cut in more than four years and said inflation was heading back to its target. The kiwi dollar NZD= was jolted backward.
The decision by one of the earliest adopters of inflation-targeting will resonate beyond NZ markets.
And there was inflation cheer in Britain, too.
Even though UK headline annual CPI inflation popped higher for the first time this year after two months bang on the 2% target, the rise to 2.2% was smaller than forecast and service sector inflation continued to ease.
Sterling GBP= nudged lower after Tuesday's sharp rally.
European and Asia stocks were generally higher on Wednesday - with Japan's Nikkei .N225 and yen JPY= 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, China's mainland stock indexes .CSI300 underperformed and closed almost 1% in the red and at their weakest in six months. Tuesday's poor data on economy-wide lending has unnerved investors once again.
There was better news for newly revived tech stocks in the incoming earnings season.
Apple AAPL.O supplier Foxconn 2317.TW beat expectations with a 6% rise in quarterly net profit on a boom in demand for AI servers and it stood by its forecast for full-year revenue to grow significantly.
On the flip side, Bloomberg reported the U.S. Department of Justice is considering options that include breaking up Alphabet's GOOGL.O Google - a week after a judge ruled the tech giant illegally monopolized the online search market.
Shares of the California-based company were down about 1% ahead of today's bell.
UBS UBSG.S, meantime, gained almost 2% as Switzerland's largest bank posted a net profit of $1.14 billion for the second quarter, comfortably surpassing analyst estimates.
Key developments that should provide more direction to U.S. markets later on Wednesday:
* US July consumer price index
* US corporate earnings: Cisco Systems, Progressive, Cardinal Health
Diminishing pricing power in US https://reut.rs/46MiD1n
CPI vs. PCE inflation https://reut.rs/4d57U4k
The path to a Fed rate cut https://reut.rs/3WLOpqz
New Zealand joins the rate cut club https://reut.rs/4dHRleN
UK inflation inches above BoE's 2% target in July but by less than forecast https://reut.rs/4fCwhZb
Editing by Bernadette Baum
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