(Reuters) – A look at what lies ahead for U.S. and global markets from Mike Dolan
This week’s initial set of inflation readings has calmed the New Year’s market turbulence, but the main event is yet to come and concerns about the rest of the year are harder to allay.
With the critical U.S. consumer price report for December due later on Wednesday, progress surveys at home and abroad were somewhat encouraging: both U.S. producer price inflation and U.S. US and British consumer prices last month were below forecasts.
And with both US and UK Treasuries having been at the center of this year’s bond storm, this has offered crumbs of solace to restless debt markets.
But the champagne corks haven’t been popped yet. Impressive headlines aside, US PPI details were much more mixed and difficult components – like airfares – may still irritate the Fed’s favorite PCE inflation gauge.
So that brings it all back to the CPI release, with the big US banks kicking off the US corporate earnings season before it arrives later today.
The upshot for bonds is that 10-year Treasury yields have come below boiling point, retreating about 5 basis points from 14-month highs above 4.8% early Wednesday. Fed futures have comfortably priced in one more Fed rate cut this year, although they are hesitant about two.
And as night follows day, that has also brought down the dollar index.
Less equivocal UK inflation data showed 10-year government bonds performing better after their torrid start to 2025, offering considerable relief to a government that fears it will be forced to tighten fiscal policy again before its underlying growth priority to materialize.
The 30-year bond yield, the most alarming this year, has retreated as much as 10 basis points from the 27-year highs it set on Monday.
Despite the implications for Bank of England easing, the pound appears to have held its level.
Curiously, British banks have resisted raising mortgage rates during the gold shakeout. Many are accepting lower profit margins and higher risks on UK home loans despite a tightening of sterling money markets, with their appetite for lending outweighing concerns about higher funding costs.
For US stock markets starting to pay attention to earnings season, the stabilization of bonds has provided some comfort.
The S&P500 rose on Tuesday, outperforming the small-cap Russell 2000. Futures rise slightly before the bell rings.
European stocks also rose, with inflation updates from France and Spain coming in as expected; the former remained below 2% for the fourth consecutive month.