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

Dolan

Much like Wall Street's rapid healing on Friday, Japanese stocks

completed their week-long, hair-raising round trip on Tuesday as

Tokyo markets returned from holiday, wiped out the remainder of

last week's losses and nudged the yen lower.

The 3.5% surge in the Nikkei 225 - a source of much

of last week's wild volatility - brought it back above the close

on Friday Aug 2.

The post-mortems now get underway. Japan's parliament plans

a special session on Aug. 23 to discuss the Bank of Japan's

decision last month to raise interest rates for the second time

and signal more to come.

But the renewed calm on world markets was evident in

Monday's modest moves in U.S. trading too. The VIX 'fear index'

is now back close to its 30-year mean just under 20 -

levels likely more sustainable than the pressure cooker readings

so far this year and ones which should work against the

reflating of the sort of speculative bubbles that burst last

week.

Attention now shifts back to the U.S. inflation picture and

whether this week's consumer and producer price updates give a

green light to the Fed to start easing next month.

The PPI is first out of the traps today, with subdued 0.2%

monthly gains expected for both headline and core measures and a

retreat in annual headline factory gate inflation to just 2.3%.

As always, key components of the PPI basket that feed directly

to the Fed's favored PCE gauge - healthcare, airfares and fund

management fees - will be watched closely.

But whatever the outcome, the Fed will be reasonably pleased

that it appears to have anchored inflation expectations again

and this alone may be enough to allow it to start cutting rates

in September.

U.S. consumers' medium-term inflation expectations eased

substantially in July, with the New York Fed's monthly household

survey showing the median three-year view dropping 0.6

percentage point to 2.3% - the lowest reading in the 11 year

history of the survey.

Financial markets tend to agree, with 10-year 'breakeven'

inflation readings from inflation-protected Treasuries

hovering just above 2.1% after hitting 3-1/2 year

lows near 2% last week.

A regular fly in the ointment could be energy prices, with

crude prices perking up to three-week highs just under

$80 per barrel amid trepidation in the Middle East about

possible Iranian retaliation.

But the move in crude is modest so far in context, with the

year-on-year oil price still negative to the tune of more than

3%.

The upshot ahead of today's bell is that Treasury yields

, the dollar index and U.S. stock futures

are all marginally higher.

Home Depot tops the earnings calendar, in a week that sees

big retailers update alongside the July retail sales report.

Overseas, sterling rose as Britain's unemployment

rate unexpectedly fell in June. But the Bank of England will

likely be encouraged by accompanying numbers that showed regular

wage growth ebbing to its lowest in two years.

The euro was a touch lower too after Germany's ZEW

sentiment index for August fell much more than forecast - likely

hampered by the market volatility last week.

In China, economic and credit worries persisted.

Chinese banks extended 260 billion yuan ($36.26 billion) in

new yuan loans in July, down from the previous month and

undershooting analysts' forecasts - highlighting weak demand as

a prolonged property downturn and job insecurity drag on

business and consumer confidence.

Key developments that should provide more direction to U.S.

markets later on Tuesday:

* US NFIB July small business survey, July producer price index

* Atlanta Federal Reserve President Raphael Bostic speaks

* US corporate earnings: Home Depot, XP, Telesat, Kimball

Electronics etc

(By Mike Dolan, editing by Christina Fincher

[email protected])