Morning Bid: Inflation relief and bumper bank earnings

A look at the day ahead in U.S. and global markets from Mike Dolan

Wall Street’s best day of the year so far was rooted in inflation relief and a boom in bank stocks reporting bumper earnings, with a retail readout up next on Thursday.

After Tuesday’s sub-forecast producer price data, the December consumer price index also surprised and the annual ‘core’ CPI inflation rate showed disinflation resuming.

With key price components on shelter and services better behaved, the 6-month annualised core CPI rate is now back below the Federal Reserve’s 2% target to its lowest in four years.

That news sparked a significant rally in troubled U.S. Treasuries and global sovereign bonds, with 10-year Treasury yield recoiling by a whopping 15 basis points on the day before steadying overnight about 4.66%. The chance of a second Fed interest rate cut this year, off the radar so far this year, was back priced at 50% in futures markets.

The dollar fell back with them, with the dollar/yen pair retreating to a new year low as speculation about another Bank of Japan interest rate rise next week builds.

The relief spread out across U.S. stock indexes too, with bumper fourth-quarter earnings from the big U.S. banks adding to the whoosh. Goldman Sachs, Citi and Wells Fargo (NYSE:WFC) all gained more than 6% on the day and the S&P 500 bank index, which has outperformed the wider market right through January, added another 3.4%.

And in the backdrop there was also some relief in the geopolitical picture with Wednesday’s announcement of a complex ceasefire accord between Israel and Hamas – although that did little to rein in crude oil hovering near 6-month highs in a tightening energy market.

With another sweep of bank reports due on Thursday, Wall Street futures have retained most of the prior day’s rally.

And for bond markets in particular, today delivers another stream of important economic soundings ahead of next week’s inauguration of Donald Trump for a second four-year presidential term.

The December retail sales report will give a glimpse of holiday season activity, but weekly jobless claims numbers will also be watched closely after last week’s latest “hot” payrolls report. The Philadelphia Fed’s January business sentiment survey is also out.

Wednesday’s release of the Fed’s Beige Book on prevailing economic conditions showed activity increased slightly in late November and December, with employment ticking up and prices rising moderately.

But a heavy slate of Fed speakers noted that while the latest inflation data was helpful, uncertainty was high about the coming months as they await policies from the incoming Trump administration.

To that effect, Thursday’s Senate hearing for Trump’s Treasury Secretary pick Scott Bessent will be watched very closely for clues about what happens next.

On Wednesday, Trump’s choice to oversee the federal budget, Russell Vought, defended the president-elect’s goal of cutting spending by refusing to spend money that Congress has already authorized.

Vought, who also headed the Office of Management and Budget during Trump’s first term, questioned the constitutionality of a 1974 law governing how Congress can review presidential refusal to spend, a process called “impoundment.”

Overseas, Wednesday’s Treasury recovery was outpaced by equally agitated British “gilts” after UK inflation also surprised to the downside and both GDP and industrial reports for November undershot forecasts too on Thursday.

The 30-year gilt has fallen back some 20bps from Monday’s 27-year peak with Bank of England easing speculation re-ignited. The pound also slipped again.

BoE interest rate setter Alan Taylor said on Wednesday he expected the central bank to cut four times in 2025, twice the pace priced into financial markets.

Global stock markets followed Wall Street higher on Thursday, with European stock indexes also gaining almost 1% as German and other euro inflation updates showed price pressures remained contained last month.

China and Hong Kong shares edged up to join a broader rally in Asia, with sentiment buoyed by state media reports of potential easing measures from Beijing in coming weeks.

State media reported that China’s central bank may cut banks’ reserve requirement ratio before the Spring Festival at the end of this month.

Key developments that should provide more direction to U.S. markets later on Thursday:

* US December retail sales, weekly jobless claims, Philadelphia Federal Reserve’s January business survey, NAHB Jan housing index, Dec import/export prices, November retail/business inventories; Canada Dec housing starts

* US corporate earnings: Bank of America, Morgan Stanley (NYSE:MS), M&T Bank (NYSE:MTB), UnitedHealth (NYSE:UNH), US Bancorp (NYSE:USB), PNC Financial (NYSE:PNC), JB Hunt (NASDAQ:JBHT)