Morning Bid: Disinflation, rotation and a bruised dollar
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[July 12, 2024] (Reuters)
- A look at the day ahead in U.S. and global markets from Mike Dolan
A violent rotation from Big Tech into small cap stocks followed the
surprisingly benign June U.S. inflation report, while U.S. borrowing
rates and the dollar plunged and Japan's yen stole the currency show.
What's now become almost traditional market volatility on U.S. CPI day
didn't disappoint on Thursday.
Although there's been some steadying of the ship early on Friday as
major U.S. banks prepare to kick off the second-quarter earnings season
in earnest, confirmation of a resumption of disinflation has left its
mark.
Seeded by a withering recoil in AI and EV giants Nvidia and Tesla, the
Nasdaq turned tail from record highs and plunged almost 2% after the CPI
report, even as small caps in the Russell 2000 surged more than 3% to
three-month highs on their best day of the year so far.
Less extreme but also dragged down by the heavyweights, the S&P 500 lost
almost 1%, though futures have held the line overnight.
At least Tesla, which tumbled 8.4% for its biggest drop since January,
had some excuse after a Bloomberg report claimed the firm is delaying
the launch of robotaxi by about two months.
But the wild rotation of stock sectors seemed more like a spontaneous
reaction to the positive inflation news, where headline prices actually
fell during the month for the first time in four years and annual
inflation dipped below 3% for the first time in 12 months.
The runes of the report were similarly impressive, with core inflation
below forecast at 3.3% - its lowest in three years - and irksome
services and shelter components also moderating.
A big drop in weekly jobless claims in the background provided a
pleasing mix, despite the confusing stock market volatility. And
producer price updates on Friday will hold the picture up to the light
again.
Federal Reserve officials were quick to applaud the piece.
St Louis Fed President Alberto Musalem called the June report
"encouraging", San Francisco Fed boss Mary Daly talked of "relief" and
the Chicago Fed's Austan Goolsbee called it "excellent" news that puts
inflation back on track to its 2% target.
The International Monetary Fund said it continues to believe the Fed can
start cutting interest rates later this year.
Rate futures agreed, with a first Fed cut now fully priced for September
and as much as 60 basis points seen over the remainder of the year.
Ten-year Treasury yields plunged to their lowest in four months, though
they popped back above 4.2% early on Friday.
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A person arranges groceries in El Progreso Market in the Mount
Pleasant neighborhood of Washington, D.C., U.S., August 19, 2022.
REUTERS/Sarah Silbiger/File Photo
The dollar, predictably, was a casualty.
And there was almost consternation in the dollar/yen pair, which
plunged almost 2% amid some suspicion and various reports the
Japanese authorities used the opportunity to intervene to buy yen
and maximize the move.
No official confirmation was forthcoming overnight, with the dollar
regaining a foothold back above 159 yen, still almost three yen
below the recent 38-year high.
The follow-through from all the upheaval in world markets through
early Friday has been messy.
Hit by the tech swoon and the yen spike, Japan's Nikkei skidded 2.5%
and other tech-heavy Asia bourses in South Korea and Taiwan fell
sharply.
While Hong Kong shares surged, Chinese mainland stocks were more
mixed as the June trade report from China threw up conflicting
signals.
While Chinese exports beat forecasts for the month, imports fell
again raising more concerns about domestic demand in the world's
second-largest economy.
In Europe, the stock reaction was mostly positive on Friday, with
only Britain's midcap FTSE250 taking a small step back from its best
level in more than two years after the CPI report.
But the dollar retreat provided a boon to both the euro and
sterling, with the post-election buzz in the latter sending it to
its highest in a year.
Elsewhere, attention remained on politics. Pressure on U.S.
President Joe Biden to step aside from November's White House race
continued after a series of verbal gaffes during his latest
appearance at the NATO summit in Washington.
Key developments that should provide more direction to U.S. markets
later on Friday:
* US June producer price index, July University of Michigan consumer
survey
* US corporate earnings: JPMorgan, Citi, Wells Fargo, Bank of New
York Mellon, Fastenal
(By Mike Dolan, editing by Sharon Singleton mike.dolan@thomsonreuters.com)
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