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Morning Bid: Fed nods to cut, chips rebound, BoE up next

[August 01, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

The Federal Reserve left Wall Street with little doubt about a first U.S. interest rate cut in seven weeks' time, but multiple cross-currents from the earnings season, Japan and China, and domestic politics all make for a noisy start to August.

The backdrop of falling rates clearly dominated on Wednesday as Fed boss Jerome Powell said a first cut could come as soon as September, putting the central bank near the end of a more-than-two-year battle against inflation just before the election.

Aided by a benign Treasury debt sale schedule, bond markets have rallied hard.

Two-year yields plunged as low as 4.25%, their lowest since February and completing a drop of more than 50 basis points for July alone. Five-year yields fell below 4% for the first time in four months and the 10-year benchmark is also flirting with 4%.

With further evidence of a cooling labor market as the backdrop ahead of Friday's July employment report, futures markets now price as much as 70bp of Fed easing by year-end.

The signals sent benchmark borrowing rates tumbling across the world, despite the Bank of Japan's jarring move in the opposite direction earlier on Wednesday.

And the Bank of England may also be poised to make its first cut of the cycle later today - with markets leaning to cut in what will likely be split decision among BoE policymakers. Sterling fell to its lowest in advance of the news.

With the yen stabilizing somewhat just below 150 per dollar after Wednesday's BOJ-related surge, the dollar index was firmer despite the Fed optimism.

Adding to the sense of monetary easing and ebbing world growth were further signs of China's economy struggling. The Caixin/S&P Global manufacturing PMI fell sharply back into contraction territory, its lowest reading since October and missing forecasts for a continued expansion.

That news knocked Chinese stocks back into the red, while Japan's Nikkei skidded more than 2% in a delayed reaction to the previous day's BoJ move and yen spike.

Although lifted by the Fed view, Wall Street stocks were also being sideswiped in the thick of the earnings season.

Chipmakers across the world rose sharply on Wednesday, aided by Microsoft's big spend on artificial intelligence capacity despite the latter's stock stumbling on its own earnings outlook.

AI-bellwether Nvidia soared 13% and added $330 billion in market cap in just one day - the biggest such gain in history. Other global chipmakers advanced on reports the U.S. government may exempt firms in allied countries from additional chip curbs on China.

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The Federal Reserve Building stands in Washington April 3, 2012. REUTERS/Joshua Roberts/File Photo

And Meta wowed the gallery overnight with its quarterly update, sending its stock up 7% ahead of Thursday's opening bell and steadying the ship for the so-called Magnificent Seven mega caps - which had wobbled over the past week.

The Facebook parent beat market expectations for second-quarter revenue and issued a rosy sales forecast for the third quarter, crucially indicating that robust digital-ad spending on its social media platforms could cover the cost of its AI spend.

Apple and Amazon will report earnings after the bell on Thursday.

The upshot on Thursday is that S&P500 and Nasdaq futures were higher again before the bell after the prior days' index surges of more than 1% and 2% respectively.

Partly on dour factory news but also on some disappointing regional earnings, European stocks bucked that trend and fell back earlier.

Euro zone manufacturing activity remained mired in contraction in July, with output declining at its fastest pace this year, according to an updated Purchasing Managers' survey.

The U.S. equivalent surveys from ISM and S&PGlobal are due out later too.

Oil prices, meantime, held Wednesday's jump on rising Middle East tensions as the OPEC+ producer group held its latest meeting.

Key developments that should provide more direction to U.S. markets later on Thursday:

* Bank of England policy decision, quarterly monetary policy report and press conference

* OPEC+ ministerial panel meets in London to review oil policy* US July manufacturing surveys from ISM and S&P Global, weekly jobless claims, Q2 unit labor costs and productivity estimates,

* US corporate earnings: Apple, Amazon, Intel, Clorox, Prudential Financial, Motorola Solutions, Microchip Technology, Consolidated Edison, Booking, Biogen, Bio Rad, Moderna, Regeneron, Cigna, Ventas, Conocophillips, Dominion Energy, Xcel Energy, Alliant Energy, Coterra Energy, Entergy, Camden Property, Kimco, Federal Realty Investment Trust, Regency Centers, Ameren, Mettler-Toledo, Hershey, GoDaddy, EOG, Gen Digital, AMETEK, Eaton, Intercontinental Exchange, WW Grainger, Southern, etc

(Editing by Bernadette Baum)

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