Big banks have reported that inflation will give comfort
(Reuters) – Watch from Mike Dolan on the upcoming day in the US and international markets
This week’s first rate hike has calmed the New Year’s market turmoil, but the main event is yet to come and it’s hard to shake off fears for the rest of the year.
After Wednesday’s crucial U.S. consumer price report for the end of December, the advance vote at home and abroad was mildly encouraging – both U.S. producer prices and British consumer price inflation were lower than last month’s forecasts.
And given that both U.S. Treasuries and British gilts are at the center of this year’s bond wave, that’s provided crumbly comfort to troubled debt markets.
But no champagne corks have popped yet. Amid headlines, US PPI figures were more mixed and sticky components — like airfares — could still hurt the Federal Reserve’s preferred PCE inflation rate.
So it all boils down to the release of the CPI, the big US banks kicking off the US corporate earnings season ahead of today’s.
The bond’s 10-year Treasury yield is off the boil, retreating nearly 5 basis points from 14-month highs to more than 4.8 percent on Wednesday. Fed futures are comfortably back on track for one more Fed rate cut this year, although they hesitated on two.
And later in the evening, that pulled the dollar index back.
Unprecedented UK inflation data showed 10-year inflation ahead of the start to 2025, giving the government significant relief that it is being forced to re-tighten fiscal policy ahead of the underlying growth priority.
The 30-year gilt yield, the biggest shock this year, retreated 10bps from the 27-year high it hit on Monday.
Despite implications for Bank of England easing, the pound appears to be holding the line.
Ironically, British banks have withstood the mortgage rush going into the gilt jolt. While many financial markets are tightening, they accept smaller profit margins and bigger risks on UK mortgages – their willingness to lend more than they worry about higher funding costs.
As U.S. stock markets begin to turn toward the earnings season, the bond stabilization has provided some comfort.
The S&P500 edged higher on Tuesday, with the small-cap Russell 2000 the best performer. The future is just before the bell.
European shares were also higher, coming on inflation forecasts from France and Spain – the former of which remained below 2% for a fourth straight month.