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

Dolan

With U.S. stocks at new records and devastating Hurricane Milton

now weakening as it passes over Florida, the shifting U.S.

interest rate horizon is back in focus with September's key

inflation update due on Thursday.

Despite the stormy weather and Middle East anxiety, U.S.

economic soundings remain robust and Federal Reserve easing

expectations continue to be dialled back - sending the dollar

to near two month highs in the process.

With the U.S. economy estimated to be still expanding at

more than 3%, markets now seeing little more than an 80% chance

of another Fed rate cut next month and the whole rate futures

curve has backed up some 50 basis points over the past month.

That puts a notional Fed 'terminal rate' closer to 3.5% -

well above the 2.9% long-term 'neutral' rate Fed policymakers

indicated at their last meeting.

Minutes of that meeting late Wednesday showed a "substantial

majority" of officials supported a half-point rate cut to start

the easing cycle, but there appeared to be agreement the first

move would not commit the Fed to any particular pace thereafter.

A stream of Fed speakers this week seem to back that up.

"Two more cuts this year, or one more cut this year, really

spans the range of what is likely in my mind," San Francisco Fed

boss Mary Daly said overnight.

After a lacklustre 10-year Treasury note auction on

Wednesday, 10-year yields climbed to their highest since July

and both two and 10-year yields have now got a foothold back

above 4%.

Perhaps more concerning for the Fed is creeping market

inflation expectations, with so-called 'breakeven' expectations

from the 10-year inflation-protected securities markets rising

to near three-month highs at 2.3% - nearly 30 basis points

higher than they were a month ago.

And more worryingly ahead of next month's election, the U.S.

Treasury 10-year term premium, a measure of the compensation

investors demand to hold long-term government debt securities,

moved back into positive territory this week.

That spins attention into today's critical consumer price

report, where headline annual CPI inflation is expected to ease

to 2.3% - its lowest in more than three years - but with 'core'

inflation stickier around 3.2%.

"I continue to see a meaningful risk that inflation could

get stuck above our 2% goal," Dallas Fed chief Lorie Logan said

on Wednesday, adding that the Fed "should not rush to reduce the

fed funds target to a 'normal' or 'neutral' level".

Even though energy markets remain nervous about

widely-expected Israeli retaliation against Iran for its recent

rocket attacks on the country, oil prices have stayed relatively

calm on Thursday and U.S. crude hovered just above $74 per

barrel.

Oil prices continue to track year-on-year losses of more

than 10%, a powerful base effect weighing on headline inflation,

and U.S. retail pump prices remain at 8-month lows.

With the third-quarter U.S. earnings season about to unfold

with the big banks reporting on Friday, there was little in the

Fed rethink that seemed to hold U.S stocks back and the S&P500

raced 0.7% higher on Wednesday to new highs.

Emboldened by the higher interest rate horizon alongside

much reduced fears of recession, banks and financial stocks led

the latest leg higher and corporate credit spreads tightened.

With the S&P500 now up 21.4% for the year to date, Deutsche

Bank analysts point out that this is strongest performance for

the index at this point of any year since 1997.

Stock futures held the bulk of the latest gains on Thursday

ahead of the CPI report, only marginally in the red ahead of

today's bell.

Overseas markets were similarly buoyant, with China's

recently volatile stock indexes catching a break after the early

week retreat on doubts about the efficacy of the Beijing's

latest economic stimulus measures.

Mainland and Hong Kong markets advanced

between 1-3% as the People's Bank of China kicked off a swap

programme aimed at supporting the stock market, while investors

await directions from further detailed fiscal policy

announcements this weekend.

With one eye on the French government's 2025 budget later on

Thursday - which is set to deliver some 60 billion euros ($65.68

billion) worth of tax hikes and spending cuts to tackle the

fiscal deficit - European stocks underperformed and

dropped 0.5%. The euro fell to its lowest in a month.

With weak sales being reported in China, European automakers

continue to suffer.

Japan's Nikkei pushed higher, however, with the yen

briefly hitting its weakest level against the dollar since

early August.

Warren Buffett's Berkshire Hathaway ( BRK/A ), meantime, has

raised 281.8 billion yen ($1.9 billion) in a yen-denominated

bond offer, a move analysts say lays the ground for the U.S

investment company to increase its exposure to Japanese assets.

In company news, GSK jumped about 6% in London after

the British drugmaker agreed to pay up to $2.2 billion to settle

U.S. lawsuits that claimed its discontinued heartburn drug

Zantac caused cancer. The figure was smaller than what some

analysts had feared.

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

markets later on Thursday:

* US September consumer price inflation, weekly jobless claims

* Federal Reserve Board Governor Lisa Cook, New York Fed

President John Williams and Richmond Fed chief Thomas Barkin all

speak

* US corporate earnings: Delta Airlines, Domino's Pizza

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

(By Mike Dolan, editing by Philippa Fletcher

[email protected])