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Marketmind: Rates dice, AI arms race and G20 snub

[August 31, 2023] A look at the day ahead in U.S. and global markets from Mike Dolan

World markets are ending a bumpy August in better sharp that the dire first half of the month - but inflation and interest rate uncertainty, China's economic funk and geopolitics still cloud the horizon.

Despite more evidence on Wednesday that the tight U.S. labor market is loosening at last, the interest rate futures market remains undecided about whether the Federal Reserve has one more rate hike left in the bag - and still sees 50-50 chance of one more move in November.

Attention shifts from the jobs market briefly back to inflation on Thursday as July PCE inflation readings - favored by the Fed - are expected to show an uptick in core inflation rates to 4.2% from 4.1% as annual base effects overshadow still-subdued monthly price gains.

That confusing annual inflation picture was mirrored in August euro zone readings that showed headline inflation surprisingly sticky at an unchanged 5.3% but falling below forecast to 6.2% when excluding food and energy.

But China's economic and market struggles continued to color the mood more generally amid a frenetic week there for international economic diplomacy, property sector support measures and corporate earnings.

China's stocks fell back in the red on Thursday after data showing manufacturing activity contracted for a fifth straight month in August. Even if that came in slightly above forecasts, an unexpectedly sharp slowdown in the country's service sector ensured another underwhelming reaction.

Those jitters cut across more positive news for the country's tech sector as the race to keep up with U.S. artificial intelligence breakthroughs went up a gear.

Four Chinese tech firms, including Baidu and SenseTime, launched AI chatbots to the public after receiving government approval, as China's government pushes to widen the use of such products in competition with Washington.

Although higher by the close, the initial jump in the sector's stocks was pared back.

With dour bank earnings and soundings from the ailing property sector in the background, geopolitics also continues to jar. Beijing appeared to downgrade next week's G20 summit in importance just after all its fanfare around an expansion of the BRICS-grouping last week - seen as its alternative to the U.S.-led G7 bloc.

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AI (Artificial Intelligence) letters and robot hand are placed on computer motherboard in this illustration taken, June 23, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

Chinese President Xi Jinping is likely to skip a summit of G20 leaders in India, sources told Reuters. Premier Li Qiang is expected to represent Beijing instead at the Sept. 9-10 meeting in New Delhi.

Overall, Asia markets were flat to negative - Europe's bourses were higher and U.S. futures held steady ahead of Thursday's open. The S&P500 is on course to end the month less than 2% lower, but that will break a string of five consecutive months of gains.

U.S. Treasury yields held steady at the week's lows, on the back foot due to softer jobs data ahead of Friday's August payrolls report. The dollar was firmer as the euro fell back on the inflation news.

Shares of UBS where the big mover and gained 6.3%, hitting their highest level since late-2008, after the bank also said it was increasing its ambitions for cost savings to more than $10 billion across the group.

Events to watch for on Thursday:

* U.S. July personal income/consumption and PCE inflation gauge, weekly jobless claims, Chicago August business survey

* Boston Federal Reserve President Susan Collins and Atlanta Fed chief Raphael Bostic speak; European Central Bank Vice-President Luis de Guindos speaks

* U.S. Treasury auctions 4-week bills

* U.S. corporate earnings: Broadcom, Dollar General, Campbell Soup, Hormel Foods, Lululemon

(By Mike Dolan, editing by David Evans, mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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