A look at the day ahead in the US and global markets by Mike Dolan
US stocks are hitting new records as the final full week of the quarter comes to an end, with China’s furious monetary easing accelerating the recovery there and Wall Street eyeing the release of the Fed’s favorite inflation gauge.
After a barrage of rate cuts, property support and stock market support this week, China’s central bank on Friday cut its one-week reverse repo rate by another 20 basis points – in an effort to convey what it likely sees as a alarming economic slowdown that may miss its 2024 targets.
Reuters reported that the Chinese cities of Shanghai and Shenzhen plan to lift remaining restrictions on home purchases to attract potential buyers and support weak real estate markets.
Whether the expanding stimulus proves effective or not, its power and intent become clear. Just like the background.
China’s industrial profits shrank sharply again in August, falling nearly 18% from a year earlier, according to new data.
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With new government loans central to the plan and hopes of some recovery in sight, yields on 10-year Chinese government bonds rose. But 16-month highs fell amid reported selling by state-owned banks.
Back on Wall Street, the continued strength of the U.S. economy was underscored Thursday by another surprise decline in weekly jobless claims, robust durable goods orders last month and after-tax corporate profit growth in the second quarter, which was revised upward to 3.5%.
Attention is now turning back to inflation to see whether the Federal Reserve’s expected easing path is justified in that light. The August PCE indicator will be released later on Friday.
While consensus forecasts call for a 0.2% rise in the “core” PCE last month, pushing annual rates up from 2.6% to 2.7%, Fed Governor Christopher Waller suggested last week that mitigating components in that report were a major reason for the Fed’s rate cuts. excessive interest rate cut of 50 basis points.
Federal Reserve Governor Lisa Cook on Thursday endorsed the size of that cut as a way to address increased “downside risks” to employment. “I wholeheartedly supported the decision.”
Treasury Secretary Janet Yellen said the economy is on track for a “soft landing” and that this could push Fed rates back to a “neutral” level — seen by Fed officials and financial markets as around 3% compared with the current 4.75-5.0%. range.
However, given the strength of the latest data, futures now see only a 50% chance of a further 50bp cut at the Fed’s next meeting in November. Another move of 25 basis points is expected, and around 75 basis points by the end of the year.
Ten-year government bond yields held steady on Friday after creeping higher over the past week, with the gap in the 2-10 year yield curve narrowing to a positive 15 basis points. US 30-year mortgage rates fell to a two-year low of 6.08% this week.
The situation was firmer, with the euro retreating as inflation rates in the eurozone increased pressure on the European Central Bank to continue cutting rates next month and money markets now cut another 50 basis points by the end of the year price in the ECB interest rate.
French headline inflation fell more than expected in September to just 1.5%, well below the ECB’s target of 2% and weighed down by sharp falls in energy prices.
With annual crude oil price declines approaching 30% after another plunge this week, the disinflationary pulse will increase everywhere.
ECB sources say dovish council members are pushing hard for a third rate cut of the year at the October policy meeting, according to a Reuters report on Thursday.
The number of unemployed people in Germany rose more than expected in September, a sign of the challenges facing Europe’s largest economy.
Elsewhere, the Bank of Mexico cut its benchmark interest rate by 25 basis points to 10.50% on Thursday, its second cut in a row, as price pressures in Latin America’s second-largest economy have eased.
And the Japanese yen jumped on Friday, reversing earlier losses, after former Japanese Defense Minister Shigeru Ishiba won the leadership contest of the country’s ruling Liberal Democratic Party and was poised to become the next prime minister.
Ishiba is a critic of past monetary stimulus and told Reuters the central bank was “on the right track” with rate hikes so far.
Key developments that should give more direction to US markets later on Friday:
* US August PCE Inflation Gauge, Personal Income and Consumption, August Trade Balance, August Retail and Wholesale Inventories, Latest September Sentiment Survey from University of Michigan
* Federal Reserve Governor Michelle Bowman speaks
(By Mike Dolan, editing by XXXX; mike.dolan@thomsonreuters.com)
