ORLANDO, Florida, Sept 10 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Surprisingly soft U.S. producer price inflation figures on

Wednesday spurred outside bets on a half a percentage point cut

in U.S. interest rates next week, pushing Wall Street to new

highs, lifting gold, and pulling bond yields lower.

In my column today I look at how the combination of Fed rate

cuts and sticky inflation will reduce 'real' U.S. rates and

yields, spelling bad news for the dollar.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Poland downs drones in its airspace, becoming

first NATO

member to fire during Ukraine war

2. Trump's Fed governor nominee Miran moves step

closer to

Senate confirmation

3. Stablecoins might reboot U.S. 'exorbitant

privilege':

Mike Dolan

4. Investors wary of Treasury's 30-year bond auction

after

recent disappointments

5. Wall Street's record rise spurs growth of covered

call

strategies

Today's Key Market Moves

* STOCKS: New highs for the S&P 500 and Nasdaq,

although

they give back their gains. Dow, Russell 2000 fall.

* SHARES/SECTORS: Oracle leaps as much as 43%,

Klarna

jumps 30% in NYSE debut. Apple slides 3.2%. Tech, utilities and

energy Wall Street's biggest advancers, consumer discretionary

the biggest decliner.

* FX: Dollar index ends flat. Brazil's real one of

the

biggest climbers, Polish zloty among the biggest decliners.

* BONDS: U.S. yields lower, down 3 bps at long end.

Curve

bull flattens, 10-year auction draws highest bid/cover since

April.

* COMMODITIES: Gold hits new closing high, oil

futures

spike nearly 2% - Brent up to $67.78/bbl, WTI pops above

$64/bbl.

Today's Talking Points:

* Tech booming ... agAIn

The extraordinary 43% surge in Oracle's share price thrusts

the whole AI bubble debate back into the sharpest focus. This is

not a penny stock, startup or meme stock, this is a

long-established tech giant, which is now suddenly close to

joining the exclusive $1 trillion market cap club.

Oracle said on Tuesday it expects booked revenue at its

Oracle Cloud Infrastructure business to exceed half a trillion

dollars. Shares traded at nearly 50x estimated 12-month forward

earnings on Wednesday, the highest since the dotcom crash, when

its forward PE topped 120.

* Fed Makeup

The composition - and independence - of the Federal

Reserve in President Donald Trump's second term continues to

dominate Fed watchers' thinking, with the focus right now

centered on Governor Lisa Cook and board nominee Stephen Miran.

A federal judge has temporarily blocked Trump from firing

Cook while Miran, currently a White House economic adviser, has

cleared a U.S. Senate hurdle. Meanwhile, Trump on Wednesday

lambasted Fed Chair Jerome Powell, calling him "a total

disaster, who doesn't have a clue" and insisting that the Fed

slash interest rates.

* Geopolitics

Oil prices spiked on Wednesday after an Israeli attack

in Qatar's capital Doha, and the Polish zloty had its worst day

in over a month after Poland shot down suspected Russian drones

in its airspace, the first time a member of NATO is known to

have fired shots during Russia's war in Ukraine.

The moves weren't too dramatic, but were a reminder to

investors of the political risk in pockets around the world that

can quickly spill over into asset prices and market volatility.

'Real' rate dip threatens to pull down dollar

The dollar has been beaten down this year as investors have

priced in a resumption of the Federal Reserve's rate-cutting

cycle. But even if lower nominal rates are already reflected in

the greenback's price, lower 'real' rates may not be.

The greenback has gotten a bit of respite recently after

recording its worst start to any calendar year since the era of

free-floating exchange rates was introduced over 50 years ago.

But it will face a renewed headwind if its real interest rate

support evaporates, which currently seems likely.

If the Fed pulls the rate cut trigger next week, as

expected, it will be doing so with inflation around 3% - a

percentage point above the central bank's 2% target. Further

easing amid sticky prices means the gap between the U.S.'s

inflation-adjusted or 'real' interest rate and those of its

developed market peers should narrow - bad news for the dollar.

'REAL' PAIN

The difference in inflation-adjusted or 'real' interest

rates and yields is often thought to play the biggest role in

determining the relative returns and purchasing power of

currencies.

Depending on what cut of annual inflation you use, the

'real' federal funds rate right now is somewhere in the 1.3-1.8%

range. That's much higher than equivalent rates in the euro

zone, Britain and most notably Japan, where the real policy rate

is deeply negative.

You can argue this hasn't prevented the dollar's eye-popping

decline so far this year. But maybe that 'real' advantage at the

short end helped avert an even steeper slide. What's going to

happen if that support evaporates?

It already has further out the curve. The dollar's 10% slide

this year is thanks in no small part to the collapse in its

positive real yield differentials in the five- and 10-year

space, for example. These spreads are currently the narrowest

since early 2022, but can shrink further.

SIXTH TIME'S THE CHARM?

Rates futures traders expect the Fed to cut rates by some

150 basis points by the end of next year, the most in the

developed world but only really playing catch-up with most of

these countries.

On the other side of the 'real' rate equation is inflation,

which remains sticky and above target across the developed

world, but particularly in the United States - and that's before

the tariff price shock truly hits.

Economists at JP Morgan on Tuesday warned that, barring

recession, 2026 will likely be the sixth year in a row

expectations of inflation returning to target will not be met.

They note that policymakers' inflation forecasting

record since 2021 has been "less than exemplary," to put it

charitably. They reckon central banks have, on average,

underestimated core inflation over the period by about one

percentage point and overshot their targets by 1.5 percentage

points.

The Bank of England has the worst record, but given the

Fed's global prominence, its poor marks are what really stand

out. The U.S. central bank's inflation forecasts have missed by

an average of 1.3 percentage point over this period, and it has

overshot its target by roughly 2 percentage points.

Of course, maybe the sixth time will be the charm, and

inflation will ease in line with Fed forecasts next year. The

soft U.S. labor market appears quite a bit mushier following

Tuesday's announcement of a record downward revision of payrolls

growth. And if unemployment rises, consumer demand, economic

activity, and price pressures will surely cool.

But for now, inflation concerns still appear to be

simmering. U.S. consumer inflation expectations are, by some

measures, closer to 5% than the Fed's 2% goal, financial

conditions are the loosest in years, and monetary and fiscal

stimulus look to be coming down the pike.

Put everything together, and you have the recipe for lower

U.S. real rates and more dollar pain.

What could move markets tomorrow?

* Japan wholesale inflation (August)

* European Central Bank rate decision, ECB President

Christine Lagarde press conference

* U.S. weekly jobless claims

* U.S. CPI inflation (August)

* U.S. Treasury auctions $22 billion of 30-year notes

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