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Morning Bid: Doldrums at last, with US retail and China housing in focus

[August 15, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

With the inflation picture under control and market volatility back in its box, summer trading doldrums may well resume as long as the U.S. retail picture holds up later on Thursday.

The extraordinary round-trip for Wall Street's VIX volatility gauge was more or less complete on Wednesday as a benign U.S. consumer price report underscored bets the Federal Reserve will start easing next month - even if that is more likely just a quarter point rate cut rather than a half.

The VIX closed at just 16.2 on Wednesday, taking just seven trading days to return below its historic median after Aug 5's blistering 38.6 finish.

To put the speed of that about-face in context, historically it has taken 170 sessions on average for the index to return below median after any close above 35. And that puts the early August episode more in line with the brief "volmageddon" flurry in early 2018 than any more durable and pernicious disturbances.

All of which puts markets back on a more fundamental footing -- and that remains reasonably sound still ahead of another screed of U.S. economic updates later on Thursday.

The CPI and preceding producer price report this week both give the Fed a green light to start cutting rates next month, with any longer-term signals from its annual Jackson Hole symposium next week now on the radar.

Although readouts on rent remain irksome - with some arguing a Fed rate cut may actually help resolve that - three-month annualized CPI on a headline and core basis is now running well below the Fed's 2% target.

CHINA PROPERTY SECTOR

While futures have baked in a quarter-point cut for September, there is now just a one-in-three chance the Fed will opt for a 50 basis point move. But 100bps of easing remains in the curve by year-end and almost 200bps through next June.

Atlanta Fed President Raphael Bostic told Thursday's Financial Times he was open to an rate cut in September and added the Fed could not "afford to be late" to ease policy.

Even though they ticked up a notch on Thursday, Treasury yields are subdued and the two-year is still below 4%. And after the S&P500's best close of the month so far on Wednesday, futures on the main stock indexes are higher again ahead of the open.

The dollar remains on the back foot, although the euro has recoiled from 2024 highs above $1.10 as still-unnerving Chinese economic updates jar in Europe too.

While Chinese industrial and retail reports for July were mostly a mixed bag, the elephant in the room remains the ailing housing sector and Thursday's data showed China's new home prices fell at the fastest pace in nine years in July.

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., June 14, 2024. REUTERS/Brendan McDermid/File Photo

With 70% of Chinese household wealth held in real estate, a sector that at its peak accounted for a quarter of the economy, consumers have kept their wallets shut tight as property values deflate.

Propping up Chinese stocks from six-month lows on Thursday was the hope that the latest economic news would increase the chance of further monetary easing, and the offshore yuan fell back. The central bank injected cash through a short-term bond instrument and said it would roll over its medium-term lending facility later this month as it extends liquidity support.

By contrast, Japan's economy expanded by a much faster-than-expected annualized 3.1% in the second quarter, rebounding from a slump at the start of the year and backing the case for another near-term rate hike. In Europe, sterling nudged higher after solid British GDP data for the second quarter.

Globally, however, economic surprise indexes are running at their most negative in more than two years.

Switching back to the day's diary on Wall Street, the heavy economic data schedule probably gets topped with by the July retail sales report and the still highly sensitive weekly jobless readout.

WalMart adds corporate flavor to the national retail aggregate with its quarterly earnings.

Dow component Home Depot warned of a decline in annual profit and a bigger drop in its annual sales earlier this week as weak discretionary spending dampened expectations. But its shares help up nonetheless.

In deals news, Kellanova surged 7.8% on Wednesday after family owned candy giant Mars said it would buy the Cheez-It and Pringles maker in a nearly $36 billion deal.

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

* U.S. weekly jobless claims, July retail sales and industrial production, August NAHB housing market index, Philadelphia Fed's Aug business survey, NY Fed's Aug manufacturing survey, June TIC data on Treasury flows

* St. Louis Federal Reserve President Alberto Musalem and Philadelphia Fed President Patrick Harker both speak

* U.S. corporate earnings: Walmart, Amcor, Applied Materials, Deere, Tapestry etc

* U.S. Treasury sells 4-week bills

(Writing by Mike Dolan; Editing by Alison Williams; mike.dolan@thomsonreuters.com)

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