Finance
Market Silence While PPI Watched, Nikkei Returns to Basics
A look at the day ahead in the US and global markets by Mike Dolan
Similar to Wall Street’s rapid recovery on Friday, Japanese shares completed their hair-raising weeklong tour on Tuesday as markets in Tokyo returned from holiday, erasing the rest of last week’s losses and pushing the yen lower.
The Nikkei 225’s 3.5% rise – a source of much of last week’s wild volatility – brought it back above its closing price on Friday, August 2.
The post-mortems begin now. Japan’s parliament plans 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 signal more to come.
But the renewed calm in global markets was also evident in Monday’s modest moves in U.S. trading. The VIX fear index is now back close to its 30-year average of just under 20 – levels that are likely more sustainable than the pressure cooker readings so far this year and should work against reinflating the kind of speculative bubbles that burst last year . week.
Attention now shifts back to the US inflation picture and whether this week’s consumer and producer price updates give the Fed the green light to start easing next month.
The PPI is the first out of the trap today, with an expected monthly gain of 0.2% for both core and bottom lines, and annual factory inflation falling to just 2.3%. As always, the key components of the PPI basket that directly contribute to the Fed’s preferred PCE measure – healthcare, airfare and fund management fees – will be closely watched.
But whatever the outcome, the Fed will be quite pleased that it appears to have anchored inflation expectations again, and this alone could be enough to start cutting rates in September.
US consumers’ medium-term inflation expectations declined significantly in July, with the New York Fed’s monthly household survey showing the average three-year expectation falling 0.6 percentage point to 2.3% – the lowest in the eleven-year history of the study.
Financial markets generally agree, with 10-year breakeven inflation rates on inflation-protected government bonds hovering just above 2.1% after hitting a 3.5-year low of almost 2.5% last week. % had reached.
A recurring factor could be energy prices, with crude oil prices likely to rise to a three-week high of just under $80 a barrel amid concerns in the Middle East over possible Iranian retaliation.
But the movement in crude so far has been modest given the context, with oil prices still negative by more than 3% year-on-year.
The result ahead of today’s bell is that Treasury yields, the dollar index and US stock futures are all marginally higher.
Home Depot tops the earnings calendar, in a week when major retailers see an update in addition to the July retail report.
Abroad, the pound rose as British unemployment unexpectedly fell in June. But the Bank of England is likely to be encouraged by accompanying figures showing that mainstream wage growth has fallen to a two-year low.
The euro was also slightly lower after Germany’s ZEW sentiment index for August fell much more than expected – likely hampered by last week’s market volatility.
In China, concerns about the economy and credit continued.
Chinese banks extended 260 billion yuan ($36.26 billion) of new yuan loans in July, down from the previous month and falling below analysts’ expectations. This highlights weak demand as a prolonged real estate downturn and job uncertainty erode business and consumer confidence.
Key developments that should give more direction to US markets later on Tuesday:
* US NFIB July Small Business Survey, July Producer Price Index
* Raphael Bostic, President of the Atlanta Federal Reserve, speaks
* US corporate profits: Home Depot, XP, Telesat, Kimball Electronics etc
(By Mike Dolan, Editing by Christina Fincher; mike.dolan@thomsonreuters.com)
