Marketmind: Disinflation cheer, debt cap fear

[May 11, 2023]  A look at the day ahead in U.S. and global markets from Mike Dolan

Investor relief that ongoing U.S. disinflation takes pressure off the Federal Reserve to resume its 14-month interest rate rise campaign remains tempered by debt ceiling anxiety.

While economists argue back and forth about the runes of April's U.S. consumer price report, the basic takeaway was headline inflation unexpectedly fell back below 5% for the first time in two years. And financial markets reacted accordingly.

Some elements of the report, such as a pickup in previously subdued goods price inflation, will keep the Fed on its toes. On the other hand, as Deustche Bank points out, the monthly 'core' rate of inflation was the lowest since February 2021 - if you exclude lagging shelter and used-vehicle components.

Something for everyone perhaps. But the upshot for Fed futures pricing was to cut the odds of a June rate hike to a mere 4% and build up bets of up to 75 basis points of easing by year-end.

Two-year 'breakeven' inflation expectations from the Treasury market are now back below the Fed's 2% target. Two-year Treasury yields fell back to as low as 3.9%, Wall Street stocks staged a tech-led advance and futures are higher again ahead of Thursday's open. The dollar held firm.

Is the fabled 'soft landing' in sight? Or are markets assuming too much, too soon?

With the year-on-year decline in crude oil prices still running at about 30%, that relatively benign picture is unlikely to be disturbed by U.S. producer price inflation numbers due later on Thursday, with forecasts for a drop in that headline rate to 2.4% from 2.7%.

And whatever is happening with China's post-COVID economic rebound, it's not generating any inflation there.

Chinese consumer and producer price inflation for April were both below forecasts - the former barely increasing 0.1% and at its lowest pace in over two years and the latter deflating by its fastest clip since the depths of the pandemic in 2020.

With investors now eyeing another round of monetary easing in China, the offshore yuan slipped.

The scenario is very different in Britain, where its most recent double-digit inflation readout is now twice the prevailing U.S. rate and the Bank of England is expected to press ahead with another quarter-point rate rise to 4.5% on Thursday. Markets price in as many as two more hikes after that.

But investor relief continues to be tempered by the U.S. debt ceiling impasse, which threatened to dominate the G7 finance chiefs meeting underway in Japan on Thursday.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 10, 2023. REUTERS/Brendan McDermid

With the next formal meeting between the White House and Congressional officials due on Friday, market jitters were most obvious in the short-term Treasury bill market. At 5.7%, one-month bill yields remain at about a half point premium to Fed policy rates and 3-month yields are climbing too, to 5.4% despite Fed expectations.

More broadly, stock market gains continue to be driven mostly by Big Tech gains - with New York's FANG+TM index of the 10 leading digital and tech firms up another 1% on Wednesday and now a whopping 43% up for 2023 to date, partly as artificial intelligence breakthroughs electrify the sector.

With 90% of the S&P500 firms now having reported first-quarter earnings, the aggregate annual profit drop is as little as 0.6% - questioning assumptions a technical earnings recession of two consecutive quarterly declines was already underway.

Estimates for full-year calendar 2023 earnings for the S&P500 have flipped positive again - having dipped negative since late March.

There was a sting in the tail for Walt Disney shares overnight however.

Disney said it reduced streaming losses by $400 million from the prior quarter but also shed subscribers, sending the firm's shares down 4.4% in after-hours trading.

Events to watch for on Thursday:

* U.S. April producer price index, weekly jobless claims

* G7 finance ministers and central bankers meet in Niigata, Japan. U.S. Treasury Secretary Janet Yellen speaks

* Bank of England policy decision

* U.S. Federal Reserve Board Governor Christopher Waller and Bank of Spain Governor Pablo Hernández de Cos speak in Madrid

* U.S. Treasury auctions 30-year bonds

* U.S. corp earnings: News Corp, Tapestry, JD.com

(By Mike Dolan, editing by Elaine Hardcastle [e-mail]. Twitter: @reutersMikeD)

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