A look at the day ahead in the US and global markets from Mike Dolan
With US stocks soaring to new highs and devastating Hurricane Milton now weakening as it passes over Florida, the variable US interest rate horizon is back in focus with a key September inflation update due on Thursday.
Despite stormy weather and anxiety in the Middle East, US economic indicators remain strong and expectations for Federal Reserve easing continue to decline – pushing the dollar to its highest levels in almost two months.
With the US economy still growing at more than 3%, markets now see a little more than an 80% chance of another Fed rate cut next month, and the entire futures price curve has risen by about 50 basis points over the past month.
This puts the Fed’s theoretical “final rate” closer to 3.5% — much higher than the long-term “neutral” rate of 2.9% indicated by Fed policymakers at their last meeting.
Minutes from that meeting late Wednesday showed that a “large majority” of officials supported a half-point rate cut to start an easing cycle, but there appeared to be agreement that the first step would not commit the Fed to any particular pace after that.
A group of Fed spokesmen this week seemed to back that up.
“Two more cuts this year, or another cut this year, is already beyond the scope of what is possible in my mind,” San Francisco Fed President Mary Daly said overnight.
After a lackluster 10-year Treasury auction on Wednesday, 10-year Treasury yields rose to their highest levels since July, and both 2-year and 10-year yields have now gained a foothold back above 4%.
Perhaps more worrying for the Fed are market inflation expectations, with so-called “break-even” expectations from 10-year inflation-protected stock markets rising to three-month highs of 2.3% — that is, nearly 30 basis points. Higher than it was before. A month ago.
More worryingly, ahead of next month’s election, the US 10-year Treasury premium, a measure of the compensation investors require for holding long-term government debt securities, returned to positive territory this week.
This draws attention to today’s important CPI report, with annual CPI inflation expected to fall to 2.3% – its lowest level in more than three years – but with ‘core’ inflation stable at 3.2%.
“I continue to see a significant risk that inflation could remain above our 2% target,” Dallas Fed President Lori Logan said on Wednesday, adding that the Fed “should not rush to lower the federal funds target to the level of… “Normal” or “Neutral”.
Although energy markets remain nervous over widely expected Israeli retaliation against Iran over its recent missile attacks on the country, oil prices remained relatively calm on Thursday with US crude hovering above $74 a barrel.
Oil prices continue to track annual losses of more than 10%, a strong fundamental effect affecting headline inflation, and US retail prices remain at their lowest levels in 8 months.
As the third quarter earnings season approaches in the US with major banks announcing on Friday, there was little rethinking at the Fed that appeared to be holding US stocks back and the S&P 500 rose 0.7% on Wednesday to new highs.
Encouraged by a rising interest rate horizon coupled with a significant decline in recession fears, banks and financial stocks have led the recent uptrend and corporate credit spreads have tightened.
With the S&P 500 up 21.4% year to date, Deutsche Bank analysts point out that this is the index’s strongest performance at this point of any year since 1997.
Stock futures held the bulk of recent gains on Thursday ahead of the CPI report, and were only marginally in the red before today’s bell.
Overseas markets were similarly buoyant, with volatile Chinese stock indexes recently getting a respite after falling at the start of the week on doubts about the effectiveness of Beijing’s latest economic stimulus measures.
Mainland and Hong Kong markets advanced between 1-3% as the People’s Bank of China launched a swap program aimed at supporting the stock market, while investors await guidance from more detailed fiscal policy announcements this weekend.
With eyes on the French government’s 2025 budget later on Thursday – which is set to introduce tax increases and spending cuts of around 60 billion euros ($65.68 billion) to address the fiscal deficit – European stocks underperformed and fell 0.5%. The euro fell to its lowest levels in a month.
With the announcement of weak sales in China, European automakers continue to suffer.
However, Japan’s Nikkei rose, with the yen briefly hitting its lowest level against the dollar since early August.
Meanwhile, Warren Buffett’s Berkshire Hathaway raised 281.8 billion yen ($1.9 billion) in a yen-denominated bond offering, a move analysts say paves the way for the US investment firm to increase its exposure to Japanese assets.
In company news, GlaxoSmithKline shares jumped about 6% in London after the British pharmaceutical company agreed to pay up to $2.2 billion to settle American lawsuits that claimed that the discontinued heartburn drug Zantac caused cancer. This number was smaller than some analysts had feared.
Key developments that should provide further guidance to US markets later on Thursday:
* September US consumer price inflation and weekly unemployment claims
* Fed Governor Lisa Cook, New York Fed President John Williams, and Richmond Fed President Thomas Barkin speak
* Profits of American companies: Delta Airlines, Domino’s Pizza
The US Treasury sells $22 billion in 30-year bonds
(Writing by Mike Dolan; Editing by Philippa Fletcher; mike.dolan@thomsonreuters.com)