Marketmind: Glass half full on disinflation

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

Stock markets seem determined to see a glass half full in assessing the foggy growth and inflation outlook, with major bourses pushing higher again on Tuesday as the critical U.S. March consumer price readout looms.

If, as many suggest, stocks are now trading more off growth than interest rate signals, then last week’s U.S. employment report had much to cheer about – with decent jobs growth along with the lowest annual wage gain since 2021.

Ahead of the start of the first quarter earnings season this week, another late rally of the S&P500 on Monday into a positive close reflected some of that dogged optimism. Futures are up slightly again on Tuesday, with European and Japanese indices up smartly too.

And even though the jobs report has stiffened expectations for one last Federal Reserve interest rate rise next month, Wednesday’s inflation reading is expected to encourage those who see the coast clearing on rate hikes from here.

Headline March consumer price inflation is expected to drop as low as 5.2% from 6% – showing the disinflation journey from more than 40-year highs of 9.2% last June to the Fed’s 2% target more than half way there. The rider is that headline inflation rates are expected be below stickier annual ‘core’ rates, which are forecast to have ticked higher to 5.6% last month.

Rick Rieder, chief investment officer of global fixed income at BlackRock, the world’s largest asset manager, thinks the Fed is as good as over.

Rieder said the current constellation of a gradually slowing economy and ebbing inflation should see “a cessation of Fed policy rate hikes after one more possible hike at the May meeting, although it’s also possible the Fed is done already.”

After the U.S. regional bank crisis last month, another possible key report on Tuesday is the small business sentiment survey for last month – given that smaller companies would have been most affected by any changes in lending conditions from the shock. The big banks start reporting first quarter earnings from Friday, but it’s not clear how much of the stress from mid-March will be captured by those.

The International Monetary Fund’s updated World Economic Outlook is also due on Tuesday ahead of the Fund’s Spring meeting in Washington.

The disinflation picture was encouraged around the world on Tuesday as Chinese consumer price inflation hit an 18-month low last month and the annual decline in factory prices sped up. The numbers spurred speculation of more monetary and fiscal stimulus from the Chinese authorities.

Geopolitical tensions persisted despite the formal end of three days of Chinese military exercises that simulated a blockade of Taiwan – with China’s aircraft and ships remaining close to the island.

The theme of easier money spread across Asia. South Korea’s central bank held its policy rates steady again, while Japan’s new central bank governor Kazuo Ueda insisted the Bank of Japan’s ultra-loose monetary policy remained appropriate.

Hopes that central bank rates are cresting worldwide lifted risk appetite across the spectrum with major cryptocurrency bitcoin broke back above $30,000 level for the first time in 10 months on Tuesday.

In banking, Credit Suisse and UBS must freeze any job cuts planned as part of their emergency merger, the Swiss Bank Employees’ Association said in an open letter to the country’s parliament.

Key developments that may provide direction to U.S. markets later on Tuesday:

* U.S. March NFIB small business survey

* IMF releases latest World Economic Outlook

* Chicago Federal Reserve President Austan Goolsbee, Minneapolis Fed President Neel Kashkari, Philadelphia Fed chief Patrick Harker all speak

* U.S. Treasury auctions 3-year notes

* U.S. President Joe Biden visits Ireland

* U.S. corporate earnings: Carmax

(Graphics – Fund flows: U.S. domiciled equities, bonds and money market funds

(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)