A look at the day ahead in U.S. and global markets from Mike Dolan
Relief at the pace of U.S. disinflation hasn't stopped markets betting on one final Federal Reserve rate hike next month, but an ebbing dollar already assumes it will be the last.
The dollar's DXY index fell to its lowest in more than two months on Thursday, with European currencies leading the way. Spurred partly by geopolitical tensions - this time North Korea's latest missile launch - the Swiss franc hit its strongest level in more than two years.
But it's the lowest U.S. headline inflation rate in almost two years that's dominated thinking, with the surprisingly large drop to 5.0% last month meaning the 'real' inflation-adjusted Fed policy rate will turn positive for the first time in three years if the central bank delivers one last rate rise in May.
Even though some policymakers wobbled about further hikes at the March meeting, due largely to the month's banking stress, and some talked of 'mild recession' ahead, minutes of the meeting suggest there was enough confidence about containing last month's bank blowup to nudge rates above 5%.
Taking in all the information, futures markets still show a near 75% chance of another quarter point rate rise to the 5.0-5.25% range in May, but more than 60 basis points of cuts from there to yearend.
Two-year Treasury yields were stuck at 4%, with producer price inflation and weekly jobless up next on Thursday's data calendar. Wall St stock futures were back in positive territory.
Signs that a global recession may indeed be avoided while inflation ebbs has many investors once again pondering the possibility that the Fed may indeed pull of a rare 'soft landing' for the economy.
Removing his forecast for a June rate hike to follow next month's move, Goldman Sachs (NYSE:GS) chief economist Jan Hatzius still thinks a soft landing can be achieved.
Certainly Thursday's news of a surprising surge in China's exports last month eased concerns about world demand and some fears about the strength of the recovery in the world's second largest economy.
Along with benign world growth forecasts from the International Monetary Fund this week, equity investors remain reluctant to throw in the towel - even if they are now focussed on defensive stocks, quality mega-caps and 'value' plays in relatively cheap European and Japanese indices.
As a case in point, the bluest of blue chip European stock indices, the STOXX50, hit its highest in 22 years on Wednesday and Warren Buffett doubled down on his bet on Japan's big brokerages.
That taste for European blue chips was underlined on Thursday as LVMH, the world's largest luxury company, gained 4.6% after reporting a 17% jump in first-quarter sales that breezed past estimates as business in China rebounded.
European markets were further pepped by reports the European Central Bank was minded to downsize its rate hikes to a quarter point in May after six successive half point moves.
One potential negative fallout from the relatively upbeat U.S. and China growth and inflation pictures is this week's pop in oil - although year-on-year Brent crude prices are still falling at whopping 20% pace and should continue to weigh on annual inflation rates through April.
Key developments that may provide direction to U.S. markets later on Thursday:
* U.S. March producer price inflation, weekly jobless claims
* Bundesbank President Joachim Nagel, Bank of Canada governor Tiff Macklem and Bank of England chief economist Huw Pill all speak
* U.S. President Joe Biden in Ireland
* U.S. Treasury auctions 30-year bonds
* U.S. corporate earnings: Delta Air Lines (NYSE:DAL), Fastenal (NASDAQ:FAST)
China exports surge, https://www.reuters.com/graphics/CHINA-ECONOMY/TRADE/jnpwyllxmpw/China%20exports.png
As US goods inflation eases, services step in, https://www.reuters.com/graphics/USA-FED/INFLATION/lbvgndazapq/chart.png
US interest rates and inflation, https://www.reuters.com/graphics/USA-FED/INFLATION/gkvlgnaywpb/chart.png
Foreign flows into Japanese stocks & futures, https://www.reuters.com/graphics/JAPAN-FLOWS/JAPAN-FLOWS/akpeqelaqpr/chart.png
(By Mike Dolan, editing by Raissa Kasolowsky; mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)