Marketmind: Inflation on the ropes, shutdown averted
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[November 15, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
Relief at the resumption of disinflation triggered the best day for U.S.
stocks and bonds since the spring as Fed rate hike bets evaporated, eyes
turned to softening retail numbers and a long-feared government shutdown
was averted until next year at least.
Encouraging the new found optimism overnight was a surprisingly large
drop in outlying British inflation too, with forecast-beating Chinese
industrial and retail numbers calming nerves about a deflationary bust
there just ahead of President Xi Jinping's meeting U.S. President Joe
Biden on Wednesday.
Wall Street stocks are on course for the best month of the year, with
the S&P500 staging its biggest one-day gain since April and pulling the
index back up to September levels.
Reflecting the disproportionate exposure of smaller firms to higher
borrowing costs, the Russell 2000 index of small caps clocked its best
day in over a year and rallied 5%.
With October retail sales data later in the day expected to show a
stalling of red-hot high street activity into the final quarter, the
warm glow of ebbing inflation and cresting borrowing costs continued
early Wednesday and S&P500 futures were up another 0.25% ahead of the
bell.
But the real action over the past 24 hours was in rates and bond
markets, where 2- and 10-year Treasury yields plummeted around 20 basis
points each in their steepest one-day drops since the regional banking
shock in March and sustained most of that move overnight. Much like
then, the sheer scale of the yield swoon has stoked bond volatility
gauges too.
The positive surprise in sub-forecast U.S. headline and core inflation
rates for last month and encouraging momentum on disinflation at large
has seen futures market remove virtually all bets on another Federal
Reserve rate hike in the cycle.
What's more, a quarter point rate cut by May is now 80% priced and
100bps of easing through 2024 is now baked in.
Overreaction? The retail and producer price readouts later today will be
the first reality check, but so too will be reactions from Fed officials
to the latest numbers.
The relatively dovish Chicago Fed chief Austan Goolsbee on Tuesday
trumpeted the makings of a spectacular soft landing for the economy -
highlighting how the economy's on course for the biggest non-war-related
one-year drop in inflation in a century and with the jobless rate still
below 4%.
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Traders work on the floor of the New York Stock Exchange (NYSE) in
New York City, U.S., September 26, 2023. REUTERS/Brendan McDermid/File
Photo
Wall St banks too seem to be falling into line. Bank of America is
the latest to say it no longer sees another hike.
And will crude oil prices still on the backfoot and declining at a
10% year-on-year rate, the disinflation cheer spreads out across the
world.
Catalyzing the biggest two-day gain in UK's FTSE 250 of mid-cap
stocks in more than three years, British inflation cooled more than
expected in October as household energy prices dropped from a year
ago and lopped more than two percentage points off the headline CPI
rate to 4.6%. Gilt yields and sterling dropped back.
And although it's clawed back some ground today, not least against
sterling, the 1.5% drop in the dollar index on Tuesday was its
biggest daily fall of the year.
Elsewhere, Chinese stocks climbed in the slipstream of the global
markets rally and better October economic news - with 4% spike in
Chinese property shares spurred by a report that authorities plan to
provide at least $137 billion of new funding to prop up the
embattled housing market.
U.S. corporate news stays on retail later as Target reports
earnings, following a beat by Home Depot on Tuesday.
In regulatory filings, Berkshire Hathaway said on Tuesday it has
shed its holdings in General Motors and Procter & Gamble and trimmed
its stake in Amazon as the conglomerate controlled by billionaire
Warren Buffett boosted its cash pile to a record $157.2 billion.
Key developments that should provide more direction to U.S. markets
later on Wednesday:
* U.S. Oct retail sales, producer price inflation; New York Fed's
November manufacturing survey; U.S. Sept business and retail
inventories
* Federal Reserve Vice Chair for Supervision Michael Barr, Richmond
Fed President Thomas Barkin both speak. Bank of England policymaker
Jonathan Haskel speaks
* U.S. President Joe Biden and his Chinese counterpart Xi Jinping
meet on sidelines of APEC Summit in San Francisco
* U.S. corporate earnings: Target, Cisco Systems, Palo Alto
Networks, TJX, Catalent
(By Mike Dolan, Editing by Bernadette Baum)
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