A Look at the Day Ahead in US and Global Markets by Mike Dolan
Just as Wall Street quickly recovered on Friday, Japanese stocks completed their horrific weeklong tour on Tuesday. Tokyo markets returned from vacation, recouping the rest of the week’s losses and pushing the yen lower.
The Nikkei 225’s 3.5% surge — a source of much of last week’s wild volatility — saw the index rise back above its closing price on Friday, August 2.
The postmortems are now beginning. Japan’s parliament is scheduled to hold a special session on August 23 to discuss the Bank of Japan’s decision last month to raise interest rates for a second time and to announce more to come.
But the renewed calm on global markets was also evident in Monday’s modest moves in U.S. trading. The VIX “fear index” is now back near its 30-year average of just under 20 — levels that are likely to be more sustainable than the pressure-pot readings so far this year and should work against a re-inflation of the kind of speculative bubbles that burst last week.
Attention now shifts back to US inflation and whether this week’s consumer and producer price updates give the Fed the green light to begin easing next month.
The PPI is the first out of the pitfalls today, with both headline and core data expected to post a modest 0.2% monthly gain and annual factory inflation to fall to just 2.3%. As ever, the main components of the PPI basket that directly contribute to the Fed’s favorite PCE gauge – health care, airfare and fund management fees – are being closely watched.
But whatever the outcome, the Fed will be reasonably pleased that inflation expectations appear to be anchored again and that this alone may be enough to begin cutting rates in September.
US consumers’ expectations for medium-term inflation fell sharply in July. The New York Fed’s monthly household survey showed that the median expectation for the next three years fell by 0.6 percentage points to 2.3%, the lowest reading in the 11 years of the survey.
Financial markets largely agree, with breakeven inflation rates for inflation-protected government bonds for the next 10 years just above 2.1%, having hit a 3.5-year low of around 2% last week.
A recurring culprit could be energy prices. Oil prices hit a three-week high, just below $80 a barrel, amid concerns in the Middle East about possible Iranian retaliation.
But the move in crude oil has been modest in context so far, as oil prices are still negative year-on-year, at over 3%.
The conclusion we can draw today is that yields on US Treasuries, the dollar index and US stock futures are all slightly higher.
Home Depot tops the earnings calendar in a week when major retailers report results simultaneously with July’s retail sales report.
Overseas, the pound rose as Britain’s unemployment rate unexpectedly fell in June. But the Bank of England is likely to be encouraged by accompanying figures showing regular wage growth slowing to a two-year low.
The euro also fell slightly after the German ZEW sentiment index for August fell much more than expected, likely due to last week’s market volatility.
In China, concerns about the economy and credit continued.
Chinese banks provided 260 billion yuan ($36.26 billion) in new yuan loans in July, down from the previous month and below analysts’ forecasts. This points to weak demand, a lingering housing recession and uncertainty over employment that are undermining business and consumer confidence.
Key developments that should provide more direction for US markets later on Tuesday:
* US NFIB Survey of Small and Medium-sized Businesses in July, Producer Price Index in July
* Raphael Bostic, president of the Federal Reserve in Atlanta, speaks
* Profits of American companies: Home Depot, XP, Telesat, Kimball Electronics etc.
(By Mike Dolan; editing by Christina Fincher; mike.dolan@thomsonreuters.com)
