New stock records as storm passes and CPI falls

A look at the day ahead in US and global markets from Mike Dolan

With US inventories at new records and devastating Hurricane Milton now weakening as it passes over Florida, the US interest rate horizon is back in focus with the key September inflation update due on Thursday.

Despite the stormy weather and anxiety in the Middle East, US economic surveys remain solid and expectations of Federal Reserve easing continue to be dismissed – sending the dollar to a near two-month high in the process.

With the US economy still expected to expand at above 3%, markets now see a little more than an 80% chance of another Fed rate cut next month, and the entire futures rate curve has supported around 50 basis points in the last month.

That brings the Fed’s notional “terminal rate” closer to 3.5 percent — well above the long-term “neutral” rate of 2.9 percent indicated by Fed policymakers at their last meeting.

Minutes of that meeting Wednesday night showed that a “substantial majority” of officials supported a half-point interest rate cut to start the easing cycle, but there appeared to be agreement that the first move would not commit the Fed at a specific rate thereafter.

A stream of Fed speakers this week seem to back that up.

“Two more cuts this year, or one more cut this year, really runs the gamut of what’s likely in my mind,” San Francisco Fed chief Mary Daly said overnight.

After a weak 10-year Treasury tender on Wednesday, 10-year yields climbed to their highest level since July, and two- and 10-year yields are now back above 4 percent.

Perhaps more worrisome for the Fed is the market’s inflationary expectations, with so-called “breakthrough” expectations on 10-year inflation-protected securities rising to near three-month highs at 2.3% — up nearly 30 basis points higher than they were a month ago.

And more worryingly, ahead of next month’s election, the 10-year US Treasury yield, a measure of the compensation investors demand for holding long-term government debt, returned to positive territory this week .

This draws attention to today’s critical consumer price report, where annual CPI inflation is expected to ease to 2.3% – the lowest level in three years – but with “core” inflation more persistent in around 3.2%.

“I continue to see a significant risk that inflation will get stuck above our 2% target,” Dallas Fed chief Lorie Logan said on Wednesday, adding that the Fed “shouldn’t rush to cut the federal funds target to a “normal ” or “neutral level”.

The story continues

Even as energy markets remain jittery over widely expected Israeli retaliation against Iran for its recent missile attacks on the country, oil prices remained relatively calm on Thursday, with US crude settling just above $74 a barrel.

Oil prices continue to track year-over-year losses of more than 10%, a strong base effect weighing on headline inflation, and US retail pump prices remain at 8-month lows.

As US third-quarter earnings season gets under way with big banks reporting on Friday, there was little Fed rethinking that appeared to hold back US stocks, with the S&P 500 up 0.7% to new highs on Wednesday.

Buoyed by a higher interest rate horizon, along with much-reduced recession fears, banks and financial stocks led the latest move higher and corporate credit spreads tightened.

With the S&P500 now up 21.4% for the year to date, analysts at Deutsche Bank point out that this is the index’s strongest performance at this point in any year since 1997.

Stock futures held the bulk of Thursday’s late gains ahead of the CPI report, only marginally in the red ahead of today’s bell.

Overseas markets were similarly buoyant, with China’s recently volatile stock indexes taking a break after retreating earlier in the week amid doubts about the effectiveness of Beijing’s latest economic stimulus measures.

Mainland and Hong Kong markets advanced 1-3 percent as the People’s Bank of China launched a swap program aimed at supporting the stock market as investors await direction from further detailed fiscal policy announcements this weekend.

With an eye on the French government’s 2025 budget later Thursday – which is set to deliver about 60 billion euros ($65.68 billion) in tax hikes and spending cuts to tackle the fiscal deficit – European stocks they performed poorly and fell 0.5%. The euro fell to its lowest level in months.

With weak sales reported in China, European automakers continue to suffer.

Japan’s Nikkei rose, however, with the yen briefly hitting its weakest level against the dollar since early August.

Meanwhile, Warren Buffett’s Berkshire Hathaway raised 281.8 billion yen ($1.9 billion) in a yen-denominated bond offering, a move analysts say lays the foundation for the investment firm’s of the US to increase its exposure to Japanese assets.

In company news, GSK rose about 6 percent in London after the British drugmaker agreed to pay up to $2.2 billion to settle U.S. lawsuits that claimed its discontinued heartburn drug Zantac caused cancer. The figure was lower than some analysts had feared.

Key developments that should provide more direction for US markets later on Thursday:

* September US consumer price inflation, weekly jobless claims

* Federal Reserve Board Governor Lisa Cook, New York Fed President John Williams and Richmond Fed President Thomas Barkin all speak

* US Corporate Earnings: Delta Airlines, Domino’s Pizza

* The US Treasury is auctioning $22 billion worth of 30-year bonds

(By Mike Dolan; Editing by Philippa Fletcher; [email protected])