Morning Bid: Disinflation, rotation and a bruised dollar

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

A violent rotation from Big Tech into small cap stocks followed the surprisingly benign June U.S. inflation report, while U.S. borrowing rates and the dollar plunged and Japan’s yen stole the currency show.

What’s now become almost traditional market volatility on U.S. CPI day didn’t disappoint on Thursday.

Although there’s been some steadying of the ship early on Friday as major U.S. banks prepare to kick off the second-quarter earnings season in earnest, confirmation of a resumption of disinflation has left its mark.

Seeded by a withering recoil in AI and EV giants Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA), the Nasdaq turned tail from record highs and plunged almost 2% after the CPI report, even as small caps in the Russell 2000 surged more than 3% to three-month highs on their best day of the year so far.

Less extreme but also dragged down by the heavyweights, the S&P 500 lost almost 1%, though futures have held the line overnight.

At least Tesla, which tumbled 8.4% for its biggest drop since January, had some excuse after a Bloomberg report claimed the firm is delaying the launch of robotaxi by about two months.

But the wild rotation of stock sectors seemed more like a spontaneous reaction to the positive inflation news, where headline prices actually fell during the month for the first time in four years and annual inflation dipped below 3% for the first time in 12 months.

The runes of the report were similarly impressive, with core inflation below forecast at 3.3% – its lowest in three years – and irksome services and shelter components also moderating.

A big drop in weekly jobless claims in the background provided a pleasing mix, despite the confusing stock market volatility. And producer price updates on Friday will hold the picture up to the light again.

Federal Reserve officials were quick to applaud the piece.

St Louis Fed President Alberto Musalem called the June report “encouraging”, San Francisco Fed boss Mary Daly talked of “relief” and the Chicago Fed’s Austan Goolsbee called it “excellent” news that puts inflation back on track to its 2% target.

The International Monetary Fund said it continues to believe the Fed can start cutting interest rates later this year.

Rate futures agreed, with a first Fed cut now fully priced for September and as much as 60 basis points seen over the remainder of the year. Ten-year Treasury yields plunged to their lowest in four months, though they popped back above 4.2% early on Friday.

The dollar, predictably, was a casualty.

And there was almost consternation in the dollar/yen pair, which plunged almost 2% amid some suspicion and various reports the Japanese authorities used the opportunity to intervene to buy yen and maximise the move.

No official confirmation was forthcoming overnight, with the dollar regaining a foothold back above 159 yen, still almost three yen below the recent 38-year high.

The follow-through from all the upheaval in world markets through early Friday has been messy.

Hit by the tech swoon and the yen spike, Japan’s Nikkei skidded 2.5% and other tech-heavy Asia bourses in South Korea and Taiwan fell sharply.

While Hong Kong shares surged, Chinese mainland stocks were more mixed as the June trade report from China threw up conflicting signals.

While Chinese exports beat forecasts for the month, imports fell again raising more concerns about domestic demand in the world’s second-largest economy.

In Europe, the stock reaction was mostly positive on Friday, with only Britain’s midcap FTSE250 taking a small step back from its best level in more than two years after the CPI report.

But the dollar retreat provided a boon to both the euro and sterling, with the post-election buzz in the latter sending it to its highest in a year.

Elsewhere, attention remained on politics. Pressure on U.S. President Joe Biden to step aside from November’s White House race continued after a series of verbal gaffes during his latest appearance at the NATO summit in Washington.

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

* US June producer price index, July University of Michigan consumer survey

* US corporate earnings: JPMorgan, Citi, Wells Fargo, Bank of New York Mellon (NYSE:BK), Fastenal (NASDAQ:FAST)

(By Mike Dolan, editing by Sharon Singleton [email protected])

This post is originally published on INVESTING.

  • Related Posts

    3 EM currency trades to consider

    Investing.com — With the U.S. presidential election concluding, Alpine Macro (BCBA:BMAm) has suggested three emerging market (EM) currency trades, especially if the Trump administration ushers in heightened protectionism.  The key pairs…

    California approves tighter rules for low carbon fuels policy

    (Reuters) -California regulators voted on Friday to toughen a policy aimed at boosting low-carbon fuels to slash greenhouse gas emissions from the transportation sector and meet state climate change goals,…

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    You Missed

    Profit Taking in Trading: An Approach to Conquer Fear and Greed

    • November 9, 2024
    Profit Taking in Trading: An Approach to Conquer Fear and Greed

    🎯 Stop System Hopping & Start Winning: Unleash Your Inner Trading Edge!

    • November 9, 2024
    🎯 Stop System Hopping & Start Winning: Unleash Your Inner Trading Edge!

    3 EM currency trades to consider

    • November 9, 2024
    3 EM currency trades to consider

    California approves tighter rules for low carbon fuels policy

    • November 9, 2024
    California approves tighter rules for low carbon fuels policy

    Explainer-Who are the key voices at the COP29 climate summit in Baku?

    • November 9, 2024
    Explainer-Who are the key voices at the COP29 climate summit in Baku?

    The Week’s Snapshot: Donald Trump’s Victory and Crypto, ASIC to Close 95 Firms, and More

    • November 9, 2024
    The Week’s Snapshot: Donald Trump’s Victory and Crypto, ASIC to Close 95 Firms, and More