Morning Bid: Stocks try to shake it off and rotate

[July 26, 2024]  A look at the day ahead in U.S. and global markets from Mike Dolan

The end of a hair-raising week for the stock market has left more questions than answers, with Thursday's bumper U.S. growth data goosing a blistering rotation to small cap stocks as traders brace for three major central bank decisions next week.

Before the Federal Reserve's latest policy decision on Wednesday, the central bank gets an update on its favored inflation gauge later today.

Core PCE prices are expected to have risen just 0.1% last month, with the annual rate slipping to a three-year low of 2.5% - a halving of that rate of inflation in 18 months.

Even though former New York Fed boss Bill Dudley this week called for an immediate rate cut to get across a weakening jobs market, futures remain nailed on for a first move in September.

Whether due to those easing bets or post-election trades or both, this month's switch to U.S. small cap stocks from pricey Big Tech megacaps seems to have survived the jarring mid-week market swoon that questioned the whole complex.

Even though the S&P500 failed to sustain Thursday's attempted early bounce, the Russell 2000 small cap benchmark closed more than 1% higher and futures have it extending those gains by a further 2% ahead of Friday's bell - putting it back in sight of 2-year highs.

Small caps have now outperformed megacap indexes by a whopping 15% since the start of this month.

Handily absorbing another $183 billion of new coupon sales this week, Treasury yields stayed focused on Fed easing prospects too - with two-year yields clinging on to 4.40% after hitting 5-month lows below that level on Thursday.

The steepening yield curve calmed down a bit.

Wild swings in the stock market this week were almost matched in the currency market too, with the yen's surge to near three-month highs spurred by speculation the Bank of Japan may lift interest rates there on the same day as the Fed decides policy next week.

The yen stepped back a bit on Friday, however, with the dollar/yen pairing recapturing 154 after a Tokyo inflation update that saw core price gains remaining well below the BOJ's target. The battered Nikkei, which has now lost more than 10% since July 11, failed to catch a break and ended lower on Friday again.

China's yuan also fell back from Thursday's peaks as markets tried to figure out whether this week's surprising spate of easing from People's Bank of China would be followed up by more stimulus from Beijing to buoy the flagging economy.

A trader works inside a booth, as screens display Viking cruise company logo, on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 1, 2024. REUTERS/Stefan Jeremiah/File Photo

Concerns about China's economy linger even after authorities said on Thursday they would allocate 300 billion yuan ($41.4 billion) in ultra-long treasury bonds to support a program of equipment upgrades and consumer goods trade-ins.

Benchmark Chinese stocks eked out a small gain on Friday.

The other major central bank meeting next week is the Bank of England. Even though a majority of economists polled think the BoE will cut as soon as August 1, money markets think it's in the balance and still only ascribe a 50-50 chance.

The pound caught a toehold after retreating to two-week lows yesterday.

Back on Wall Street, Friday's earnings calendar thins a bit but next week brings another round of Big Tech megacap reports to test growing concerns about valuations and big capex spends on artificial intelligence.

Even though the overall profit growth picture remains buoyant, some single stock earnings day moves continued to be eye-catching.

Ford Motor's shares tumbled over 13% to a near six-month low on Thursday after the automaker missed estimates as it struggles with quality-related costs and stiff competition in its EV business.

Elsewhere, NatWest gained 8% after the British bank said it would buy Metro Bank's mortgage portfolio for 2.4 billion pounds.

Key developments that should provide more direction to U.S. markets later on Friday: * US June PCE inflation gauge, personal income and consumption. University of Michigan's final July sentiment survey

* US corporate earnings: Aon, T Rowe Price, 3m, Bristol-Myers Squibb, Centene, Charter Communications, Colgate-Palmolive, Franklin Resources

(By Mike Dolan; Editing by Toby Chopra; [e-mail])

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