Markets brace ahead of US inflation data, RBNZ cut surprises

Wall Street surges as soft PPI data bolsters rate cut bets

Global stocks and bonds are rallying anew, buoyed by impressive disinflation and a growing list of central bank interest rate worldwide. Anticipation is building ahead of today's U.S. consumer price inflation (CPI) update, which could pave the way for an interest rate cut from the Federal Reserve next month.

Wall Street indexes surged on Tuesday, bolstered by a benign producer price index (PPI) and the VIX volatility gauge dropping below its 30-year average. Futures have held the move ahead of the CPI release.

U.S. producer price inflation for July fell more than expected – the report’s most eye-catching aspect was the sharpest decline in service costs in nearly 18 months. As services inflation has been a persistent concern for the Federal Reserve, this development could be a game-changer, especially since other PPI components that influence the Fed's preferred PCE inflation gauge also showed moderation.

Markets expect US inflation to grow by 0.2%

Today's US inflation report is expected to show modest monthly gains of 0.2% at both headline and core levels. With various inflation expectations receding, futures markets are now pricing in up to 107 basis points of Fed rate cuts for the remainder of the year.

Even the typically hawkish Atlanta Fed President Raphael Bostic indicated a need for more data before supporting a rate cut, a position likely to be reassessed before the September meeting.

Treasury yields have reacted accordingly, with two-year yields dropping below 4% and 10-year yields down to 3.84%. The dollar weakened, and the euro reached its highest level of the year against the greenback, supported by the eurozone's second-quarter GDP growth aligning with expectations at 0.3%.

With US inflation easing and Fed cuts looming, the broader economy is on track for nearly 3% real growth, and corporate profits are up nearly 14% annually. This optimistic backdrop led the S&P 500 and Nasdaq to gain more than 1%.

New Zealand interest rate cut surprises markets

The global easing trend continued Wednesday as the traditionally hawkish Reserve Bank of New Zealand surprised markets with its first interest rate cut in over four years, citing inflation returning to target. The kiwi dollar declined in response. The move by one of the earliest adopters of inflation-targeting is likely to influence markets beyond New Zealand.

In the UK, inflation news was also positive. Although headline CPI inflation rose slightly to 2.2%, this increase was smaller than expected, and service sector inflation continued to ease. Sterling edged lower following a sharp rally on Tuesday.

European and Asian stocks were generally higher on Wednesday, with Japan's Nikkei index and yen unaffected by news that unpopular Prime Minister Fumio Kishida will step down as ruling party leader in September after three years in power.

However, China's mainland stock indexes underperformed, closing nearly 1% lower and hitting a six-month low, spooked by Tuesday's disappointing lending data.

Foxconn reports rise in profits, Alphabet shares down on news of Google break-up

In the tech sector, there was positive news as Foxconn, a key Apple supplier, reported a 6% rise in quarterly net profit, driven by strong demand for AI servers, and reaffirmed its full-year revenue growth forecast.

Conversely, Bloomberg reported that the U.S. Department of Justice is exploring options that could include breaking up Alphabet's Google, just a week after a judge ruled that the tech giant illegally monopolized the online search market. Shares of Alphabet were down about 1% in pre-market trading.

Swiss bank UBS saw nearly a 2% gain after reporting a net profit of $1.14 billion for the second quarter, significantly exceeding analyst expectations.

Key developments that could influence US markets later today include the release of the US inflation reading for July and corporate earnings reports from Cisco Systems, Progressive, and Cardinal Health.

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