A look at the day ahead in US and global markets by Mike Dolan
Just as Wall Street staged a rapid recovery on Friday, Japanese stocks completed their weeklong round-trip on Tuesday, as Tokyo markets returned from vacation, erased the remainder of last week’s losses and pushed the yen lower.
The Nikkei 225’s 3.5% gain, which caused much of last week’s extreme volatility, took it back above its closing level on Friday, August 2.
The autopsy begins. Japan’s parliament is scheduled for a special session on August 23 to discuss the Bank of Japan’s decision last month to raise interest rates for a second time and announce further measures to come.
But the renewed calm in global markets was also evident Monday in modest moves in the United States. The VIX fear index is now back near its 30-year average, just below 20, levels that are likely more sustainable than this year’s pressure-cooker readings and should prevent the re-inflation of speculative bubbles of the type that burst last week.
Attention now turns to U.S. inflation and whether this week’s consumer and producer price updates give the Fed the green light to start easing rates next month.
The PPI is the first to emerge from the traps today, with moderate monthly gains of 0.2% expected for both headline and core measures and annual factory-gate inflation set to decline to just 2.3%. As always, the key components of the PPI basket that feed directly into the Fed’s preferred PCE gauge—health care, airfares, and fund management fees—will be closely watched.
But whatever the outcome, the Fed will be reasonably pleased to have re-anchored inflation expectations and that may be enough to allow it to start cutting rates in September.
U.S. consumers’ medium-term inflation expectations fell sharply in July, with the New York Fed’s monthly household survey showing the median three-year forecast fell 0.6 percentage points to 2.3% – the lowest level in the survey’s 11-year history.
Financial markets tend to agree, with the “breakeven” inflation reading for 10-year Treasury Inflation-Protected Notes sitting just above 2.1% after hitting a 3-1/2-year low of near 2% last week.
Energy prices could be a regular black spot, with crude prices hitting three-week highs just below $80 a barrel amid concerns in the Middle East about possible Iranian retaliation.
But the evolution of the crude price has been modest so far in this context, with the year-on-year oil price still negative by more than 3%.
The result before today’s close is that Treasury yields, the dollar index and U.S. stock futures are all slightly higher.
Home Depot tops the earnings calendar in a week when major retailers take stock alongside the July retail sales report.
Overseas, sterling gained as the UK unemployment rate unexpectedly fell in June. But the Bank of England will likely be encouraged by the accompanying figures, showing that steady wage growth has hit a two-year low.
The euro was…
