US inflation report to set the tone

Thursday’s US inflation report could test markets, with consensus coalescing around the first Federal Reserve rate cut of this cycle in September.

The consumer price report for June is expected to show an annual change of 3.1%, moderating from 3.3% the prior month. As it stands, Fed funds futures are showing a 70% chance that the central bank will ease at its September meeting, according to CME FedWatch. But rate-cut expectations have swung wildly this year, and a surprise inflation spike could further jolt projections and rattle asset prices.

Fed Chair Jerome Powell, back on Wednesday for his second day of testimony before Congress, said the central bank will make rate decisions “when and as” they are needed. He pushed back on a suggestion that a September rate cut could be seen as a political act ahead of the Nov. 5 US presidential election.

Ahead of the CPI report, the mood was buoyant on Wall Street. The S&P 500 and Nasdaq Composite both gained slightly over 1% and finished at record highs. Nvidia shares added to their monster run for the year, rising 2.7% with all of the “Magnificent 7” megacaps posting gains.

Second-quarter earnings season is soon to heat up, with major banks led by JPMorgan reporting on Friday.

The dollar edged lower on Wednesday while US Treasury yields slipped as traders assessed Powell’s comments.

Rate decisions were a hot topic elsewhere around the globe. Bank of England Chief Economist Huw Pill undercut hopes for an August interest rate cut, noting price pressures in Britain’s economy.

New Zealand’s central bank held its cash rate steady on Wednesday, but opened the door to monetary policy easing over time should inflation slow as expected.

The Bank of Korea is expected to keep its policy rate on hold at a 15-year high on Thursday, with a cut seen in the next quarter, a Reuters poll found.

In China, meanwhile, the fears were of deflation and weak demand. Data on Wednesday showed China’s consumer prices grew for a fifth month in June but missed expectations. China shares closed lower after the data, with the blue-chip CSI300 index dropping 0.3%.

Japan’s Nikkei, meanwhile, closed up 0.6% at a record high as its 2024 run rolled on.

Here are key developments that could provide more direction to markets on Thursday:

– Bank of Korea meeting

– Malaysia central bank meeting

– US consumer price index report (June)

(Reporting by Lewis Krauskopf; Editing by Josie Kao)