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

Dolan

It may seem like an over-reaction to an inflation miss of less

than a tenth of a percentage point, but the heated March

consumer price update has jolted markets into doubting any U.S.

interest rate cut before the November election.

After much trepidation ahead of the report, the monthly rise

in U.S. CPI rise was 0.359% - rounded up to 0.4%, compared to

the 0.3% forecast. The rounded print would have been in line

with expectations had the number come in less than one basis

point lower.

To be sure, the narrative quickly focussed on stubborn rent

rises and shelter inflation, spiky insurance costs and the third

month in a row of a rounded 0.4% monthly gain in 'core' CPI

inflation that kept annual core inflation stuck at 3.8%.

But the market reaction was dramatic - some might say over

the top. Futures markets virtually wiped the chances of a June

Federal Reserve rate cut off the map, see less than a 50% chance

of move in July and now doubt there will be any more than one

rate cut this year - despite Fed policymakers indicating as many

as three only last month.

Minutes of that Fed meeting released later on Wednesday did

little to calm the horses.

Perhaps most pointedly for those watching the political

calendar, a first quarter-point Fed rate cut is now not fully in

futures prices until the Nov 7 meeting - days after this year's

White House and Congressional elections.

With the political optics around a first cut in September

likely tricky for the Fed, futures only see about an 80% chance

of a move then.

The CPI news knocked Wall St stock benchmarks almost

1% and triggered the biggest one-day jump in 2-year Treasury

yields and biggest one-day jump in the dollar index

since March last year.

The dollar move was exaggerated by the yen slicing

through presumed Bank of Japan intervention barriers around 152

per dollar to hit its weakest since 1990 above 153 on Thursday -

significantly without any sign of BOJ purchases.

And the fact that markets still see a 75% chance of a June

rate cut from the European Central Bank - which is meeting on

Thursday - despite the Fed futures wipeout, triggered the

biggest one-day drop in over a year in the euro/dollar exchange

rate too.

The fundamental reasons for the dollar move were pretty

clear and it was the biggest daily surge in 10-year Treasury

borrowing rates since 2022.

Coming in a week of heavy new debt sales at the long-end of

the Treasury curve didn't help. And some $22 billion of 30-year

bonds are up for grabs later on Thursday.

Investors will now focus on Thursday's producer prices

report for a clearer picture of March inflation - looking at

components in there that may give more clues on how the Fed's

favored PCE inflation gauge is evolving.

A stream of Fed speakers will, perhaps literally, be watched

like a hawk.

But whatever you think is driving the renewed inflation

angst, it's certainly not happening in China.

China's annual consumer inflation cooled more than expected

in March to just 0.1%, while producer price deflation persisted,

maintaining pressure on policymakers to launch more stimulus

there as demand remains weak.

Overall, Wednesday's market selloffs seem to calm a bit on

Thursday. Treasuries hogged Wednesday's closes, even though Wall

St stock futures were in the red again ahead of the bell - as

were Asia and European bourses earlier.

More worrying for inflation-watchers was the overnight

geopolitical developments.

Oil prices pushed higher again on Middle East

tensions.

The German airline Lufthansa on Thursday extended the

suspension of its flights to Tehran, with the region on alert

for Iranian retaliation for a suspected Israeli air strike on

Iran's embassy in Syria.

An Iranian news agency had published an Arabic report on the

social media platform X saying all airspace over Tehran had been

closed for military drills, but then removed the report and

denied issuing such news.

The region and the United States have been on alert for a

retaliatory attack by Iran since April 1, when Israeli warplanes

were suspected of bombing the Iranian embassy compound in Syria.

Markets are also trying to focus on the start of the first

quarter earnings season and a trio of big banks- JPMorgan,

Citigroup and Wells Fargo - are slated to post results on

Friday.

Analysts expect aggregate S&P 500 earnings in the first

quarter to grow 5.0% from last year, according to LSEG data.

That is lower than the 7.2% annual earnings growth for the

quarter forecast on Jan. 1.

Key diary items that may provide direction to U.S. markets later

on Thursday:

* European Central Bank policy decision and press briefing

* US March producer price index, weekly jobless claims

* Federal Reserve Bank of Boston President Susan Collins, New

York Fed President John Williams, Richmond Fed chief Thomas

Barkin and Atlanta Fed chief Raphael Bostic all speak

* US Treasury sells $22 billion of 30-year bonds

* US corporate earnings: Constellation Brands, Carmax, Fastenal

* Eurogroup finance ministers meet in Brussels

(By Mike Dolan, editing by Christina Fincher,

[email protected])