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Morning Bid: Sidestepping CPI for AI, China wobbles anew

[March 13, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

Even as U.S. inflation missed forecasts again and Treasury debt yields reared up in reaction, AI-fueled Wall St stock indexes powered on regardless to record closing highs - either ignoring the readout, or perhaps even thriving on it.

While economists sliced and diced the slightly hotter-than-expected consumer price report for February, there was little doubt about the bond market disappointment at least.

Although annual "core" CPI inflation fell again to 3.8% - its lowest in almost three years - it was a tenth of a percentage point above forecast, the headline inflation rate ticked up surprisingly to 3.2% and monthly readings were sparky.

Many blamed statistical quirks in official models for the early-year stickiness, with rent estimates and gasoline exaggerating the data and services inflation excluding shelter - closely watched by the Federal Reserve - better behaved.

But interest rate futures shaved expected Fed easing expectations for the year nonetheless and both two and 10-year Treasury yields pushed higher - the latter up by more than 5 basis points to 4.15%, where it sat early on Wednesday.

A poorly received 10-year note auction - partly because of the CPI surprise - possibly goosed that move. And some $22 billion of 30-year bonds go under the hammer later on Wednesday.

But the artificial intelligence obsession in stocks was reinvigorated by an AI-infused results beat from Oracle, whose shares surged 12% as it said it was due to make a joint announcement with AI bellwether Nvidia.

Nvidia stock, in turn, recovered much of the past week's losses and surged 7%.

What's more, shares in another AI darling, Arm Holdings, the British chip designer backed by Softbank Group, gained 2% as markets braced for increased trading activity following the expiration of the lockup period tied to its blockbuster initial public offering last September.

All of which helped lift S&P500 to a new closing high despite the inflation cloud and futures held those gains on Wednesday.

Although with markets still pricing Fed rate cuts even with long-term inflation expectations settling above its 2% target, there may be argument that stocks are beginning to like an economy running slightly hot.

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AI (Artificial Intelligence) letters and robot hand are placed on computer motherboard in this illustration taken, June 23, 2023. REUTERS/Dado Ruvic/Illustration/File Photo

Bank of America on Tuesday upped its S&P500 profit growth forecast for this year to 12%, backing its raised year-end target for the index to 5,400.

Other more skeptical investors remain wary, with GMO's Jeremy Grantham this week describing the AI "bubble" as "a new bubble within a bubble."

Overseas, China's stocks slipped again on Wednesday - dragged down by ailing property developers as Country Garden missed a coupon payment on its debt.

The yuan also fell back sharply.

Japan's Nikkei index fell for a third straight session as investors assessed the likelihood of a policy shift at next week's Bank of Japan meeting.

With wage growth key to the BOJ decision, Toyota agreed to give factory workers their biggest pay increase in 25 years on Wednesday and that heightened expectations that bumper pay raises will give the central bank leeway to tighten policy.

The dollar was up more broadly, however, and dollar/yen nudged higher.

Bitcoin, which has trebled since September, continued to surge above $73,000 ahead of next month's "halving" event.

In politics, U.S. President Joe Biden and former President Donald Trump both clinched their parties' nomination on Tuesday, kicking off the first U.S. presidential election rematch in nearly 70 years.

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

* U.S. Treasury auctions $22 billion of 30-year bonds

* U.S. corp earnings: Lennar, Dollar Tree

* U.S. Secretary of Commerce Gina Raimondo visits Thailand

(By Mike Dolan, editing by Nick Macfie mike.dolan@thomsonreuters.com)

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