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Morning Bid: CPI vigil, Canada decides, China credit warning

[April 10, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

Wall St stocks have held up remarkably well in the face of the renewed interest rate angst of the past week but Wednesday's March inflation readout may now be make or break from here.

A late bounce for the S&P500 on Tuesday saw the index close in positive territory and stock futures tick higher ahead of the consumer price report later today.

For all the worries about the stubborn 'last mile' of the disinflation process, consensus forecasts would suggest the market calm is warranted for now. The core annual CPI rate is expected to have ticked a tenth of a percentage point lower to 3.7% last month even if headline rates likely picked up steam.

The restive Treasury market has also steadied into the critical release, despite a poor 3-year auction on Tuesday and with $39 billion of 10-year notes going under the hammer later.

Crude oil's 3% retreat this week from Friday's 2024 high has helped somewhat.

The dollar too has frozen awaiting the inflation readout, with the Bank of Canada deciding on interest rates later today and the European Central Bank meeting on Thursday too.

Canadian rates are expected to be kept on hold at 5.0% for now, although money markets still price an 80% chance of a cut in June - as they do for the ECB.

With Federal Reserve policy rate futures still wavering about a U.S. cut that month, markets seem comfortable that the ECB, Bank of Canada and even Bank of England will now jump the Fed gun in starting the rate cut cycle.

New Zealand's central bank held its rate steady on Wednesday as expected but it cautioned that it may need to remain restrictive for a sustained period to drive inflation down to its 1-3% target range and markets don't expect any easing there until August.

What's more, some Fed hawks continue to suggest rates may not be cut at all this year.

Atlanta Fed President Raphael Bostic said on Tuesday that it's possible rates stay on hold through 2024 if progress on inflation stalls and the economy continues to outperform.

"I can't take off the possibility that rate cuts may even have to move further out," Bostic said in an interview with Yahoo Finance.

Fed minutes of its March policy meeting are also released later on Wednesday.

Inflation concerns apart, there were some signs of stress in the U.S. corporate picture on Tuesday as the NFIB's small business survey showed confidence ebbing to an 11-year low - albeit with inflation still registering as the major concern.

Overseas markets were firmer going into the big U.S. release - perhaps partly emboldened by hopes of earlier credit easing in Europe and elsewhere.

Tech stocks were a winner in Europe and Hong Kong early on Wednesday after giant Taiwanese chipmaker TSMC reported a forecast-beating 16.5% rise in first-quarter revenue - the high end of the firm's own guidance as its sales boomed on demand for artificial intelligence applications.

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The New York Stock Exchange building is seen from Wall Street in Lower Manhattan in New York, January 20, 2016. REUTERS/Mike Segar/File photo

Japan's Nikkei and China's mainland indexes were underperformers, however.

Japanese government bond yields hit a four-week high after Bloomberg reported the Bank of Japan will likely consider raising its inflation forecast at a policy meeting later this month.

But, still wary of BOJ intervention, the dollar/yen exchange rate hovered just under the 152 yen level.

BOJ boss Kazuo Ueda said the central bank would not directly respond to currency moves in setting monetary policy, brushing aside market speculation that the yen's sharp falls could force it to raise interest rates.

"We absolutely won't change monetary policy directly in response to exchange-rate moves," Ueda told parliament.

China's markets were also under a cloud on Wednesday after Fitch cut its outlook on China's sovereign credit rating to negative, citing risks to public finances as the economy faces increasing uncertainty in its shift to new growth models.

The outlook downgrade follows a similar move by Moody's in December and comes as Beijing ratchets up efforts to spur a feeble post-COVID recovery in the world's second-largest economy with fiscal and monetary support.

Chinese government bonds held steady, however.

Key diary items that may provide direction to U.S. markets later on Wednesday:

* US March consumer price index

* Bank of Canada policy decision, news conference

* World Trade Organization publishes its Global Trade Outlook

* Federal Open Market Committee publishes minutes of March policy meeting

* Federal Reserve Board Governor Michelle Bowman, Chicago Fed President Austan Goolsbee and Richmond Fed chief Thomas Barkin all speak

* US Treasury sells $39 billion of 10-year notes

* US President Joe Biden welcomes Japanese Prime Minister Fumio Kishida for state visit

(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com)

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