ORLANDO, Florida, June 4 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Markets again lacked a unifying theme on Wednesday, as world

stocks hit record highs, Wall Street ended mixed and Treasury

yields tumbled, all against a backdrop of patchy U.S. economic

data and a lack of clarity on global trade talks.

In my column today I look at how, despite justifiable fears

of tariff-fueled price rises later this year and beyond, the

global forces of disinflation are stronger right now than the

forces of inflation. More on that below, but first, a roundup of

the main market moves.

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. U.S. private payrolls post smallest gain in over

two

years in May

2. Euro needn't dethrone dollar to draw reserve

flood: Mike

Dolan

3. Trump tax-cut bill could cost $2.4 trillion, less

than

earlier forecast

4. Trump calls China's Xi tough, 'hard to make a

deal with'

5. U.S. economic activity declines as tariffs

pressure

prices, Fed says

Today's Key Market Moves

* World stocks hit an all-time high, as the MSCI All

Country index rises for a third day to 890.94 points.

* The S&P 500 and Nasdaq edge higher, with the tech sector

among

the leading gainers and energy the biggest decliner.

* The Canadian dollar climbs to an eight-month high of

1.3650 per

$ after the BoC leaves interest rates unchanged at 2.75%.

* Treasuries rally following a batch of weak U.S. economic

data.

Longer-dated yields fall 10 bps, the steepest drop in seven

weeks.

* Oil falls 1%, pressured by a surprisingly large

build-up

in gasoline and diesel inventories.

Teflon stocks glide higher

Financial market moves can usually be traced to, or at least

reasonably explained by, a narrative or new development that

changes investors' view of the value of the asset in question.

But some days, they are difficult to rationalize.

Wednesday was one of those days, at least in equities. Wall

Street rose for a third session, the Nasdaq climbed back into

the green for the year, and global stocks rose to their highest

level on record.

Yet the newsflow was hardly bullish, although the

nonpartisan U.S. Congressional Budget Office did lower its

estimate of how much President Donald Trump's tax-cut and

spending bill will add to the national debt by $1.4 trillion.

On the trade front, the Trump administration doubled steel

and aluminum tariffs, and it became clear that trade talks with

Europe and China are proving difficult. The deadline for

countries to show their "best offers" to avoid other punitive

import levies taking effect next month passed on Wednesday too.

China's decision in April to suspend exports of a wide range

of rare earths continues to wreak havoc across crucial supply

chains around the world, especially in the auto industry. Some

European auto parts plants have suspended production.

On the economic data front, the U.S. 'stagflation' alarm

bells could not have rung louder on Wednesday.

Figures showed U.S. private sector employment growth in May

was the slowest in more than two years, perhaps an ominous

signal for Friday's non-farm payroll report. Meanwhile, the

services sector contracted in May for the first time in nearly a

year and input prices paid by businesses leaped to their highest

in two and a half years.

If gold prices took their cue from the 'flation' side of

those numbers, the bond market took its cue from the 'stag' side

of the equation. Treasuries prices rallied strongly, and the

10-year yield posted its biggest fall since mid-April.

Trump used the weak economic data to take to social media

and repeat his call for Fed Chair Jerome 'Too Late' Powell to

lower interest rates, complaining that "Europe" has already cut

rates nine times.

If he's referring to the European Central Bank, that's not

quite accurate. The ECB has cut rates seven times since June

last year, but is widely expected to make that eight on

Thursday.

The Bank of Canada took a leaf out of the Fed's book on

Wednesday, deciding against cutting interest rates and choosing

to wait and see what the effects of U.S. trade policy are. It

said another rate cut might be needed, however, if the economy

slows sufficiently.

Aside from the ECB, the biggest market-moving event on

Thursday could be China's 'unofficial' services sector PMI

report for May. Signs of renewed weakness might be the cue for a

'risk-off' tone to world markets on Thursday, although the

evidence of Wednesday shows that's no guarantee.

Disinflation is a greater force right now than inflation

Investors, consumers and policymakers may justifiably fear

the specter of tariff-fueled inflation later this year and

beyond, but it's powerful global disinflationary forces that are

weighing most heavily right now.

The OECD said on Tuesday it expects collective annual

headline inflation in G20 economies to moderate to 3.6% this

year from 6.2% last year, cooling further in 2026 to 3.2%.

But the United States is an "important exception," the OECD

argues, and it sees inflation there rising to just under 4%

later this year and remaining above target in 2026.

While annual PCE consumer inflation in the U.S. cooled to

2.1% in April, the slowest rate in four years and virtually at

the Fed's 2% target, consumer inflation expectations are the

loftiest in decades. The Fed has paused its easing cycle as a

result, and U.S. bond yields are higher than most of their G10

peers.

Economists at Goldman Sachs share the OECD's view that U.S.

inflation will pick up to near 4% this year, with tariffs

accounting for around half of that. Many others also agree that

the U.S. appears to be the exception, not the rule.

The world's next two largest economies, China and the euro

zone, find themselves trying to stave off disinflation.

Deepening trade and financial ties between the two may only

intensify these forces, keeping a lid on price increases.

SPECTER OF DEFLATION

Annual inflation in the euro zone cooled to 1.9% in May,

below the European Central Bank's 2% target, essentially setting

the seal on another quarter-point rate cut later this week. More

easing appears to be in the cards.

As economists at Nomura point out, inflation swaps are

priced for inflation undershooting the ECB's target for at least

the next two years. This, combined with weakening growth due to

U.S. tariffs and disinflationary pressure from China, could

force the ECB to cut rates another 50 basis points to 1.5% by

September.

China's war on deflation is, of course, well-known to

investors, but it has appeared to slip off their collective

radar given how protracted it has become.

The last time annual inflation in China eclipsed 1% was more

than two years ago, and it has remained near zero, on average,

ever since. China's 10-year bond yield remains anchored near

January's record low below 1.60%, reflecting investors'

skepticism that price pressures will accelerate any time soon.

They have reason to be doubtful. Deflation and record-low

bond yields continue to stalk the economy despite Beijing's

fiscal and monetary stimulus efforts since September. And

punitive tariffs on exports to the U.S., one of its largest

export markets, are generating massive uncertainty about the

country's economic outlook moving forward.

REER-VIEW MIRROR

This is where the exchange rate becomes important. On the

face of it, Beijing appears to have resisted mounting pressure

on the yuan thus far, with the onshore and offshore yuan last

week trading near their strongest levels against the dollar

since November.

But when considering the yuan's broad real effective

exchange rate (REER), an inflation-adjusted measure of its value

against a basket of currencies, the Chinese currency is the

weakest since 2012. Robin Brooks at The Brookings Institution

reckons it may be undervalued by more than 10%.

With China's goods so cheap in the global marketplace, China

is essentially exporting deflation. And the yuan's relative

weakness could put pressure on other Asian countries to weaken

their currencies to keep them competitive, even as the Trump

administration potentially encourages these governments to do

the exact opposite.

Countries in Asia and around the world, especially in the

euro zone, may also be nervous that China could dump goods

previously bound for the U.S. on their markets.

If anyone wants confirmation that the "tariffs equal

inflation" view is too simplistic, they got it this week from

Switzerland, where deflation is back and potential negative

interest rates may not be far behind.

True, Trump's threatened tariffs could throw everything up

in the air. But the Swiss example is a warning to markets and

policymakers that global disinflationary forces may be

spreading.

What could move markets tomorrow?

* Australia trade (April)

* South Korea GDP (Q1, revised)

* China Caixin services PMI (May)

* European Central Bank interest rate decision

* Canada trade (April)

* Canada PMI (May)

* U.S. weekly jobless claims

* U.S. trade (April)

* Fed officials speaking at various events include: Fed

Governor

Adriana Kugler, Kansas City Fed President Jeffrey Schmid, and

Philadelphia Fed President Patrick Harker

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.