Oil rises nearly 2% on upbeat US economic data, geopolitical tension

NEW YORK – Oil prices gained more than USD 1 a barrel on Thursday after US economic data allayed fears of recession in the world’s biggest economy, although the rally was limited by concerns of slower global demand.

Brent crude futures settled up USD 1.28, or 1.6%, at USD 81.04 a barrel. US West Texas Intermediate crude futures rose by USD 1.18, or 1.53%, to USD 78.16.

Data showed US retail sales rose more than expected in July. Another report showed a smaller-than-expected increase in the number of Americans filing for unemployment benefits.

“The positive economic data serve as an indicator that we’re heading towards a soft landing,” said Bob Yawger, director of energy futures at Mizuho in New York.

Data from the Labor Department on Wednesday showed US consumer prices rose moderately in July. This reinforced expectations that the Federal Reserve would cut interest rates next month, which could boost economic activity and oil consumption.

Oil prices also drew support from worries about how Iran would respond to the killing of the leader of the Palestinian militant group Hamas last month.

“Geopolitics and the risk of an expanding conflict in the Middle East are propping up prices, as the threats of retaliation continue to grow louder,” said Tim Snyder, chief economist at Matador Economics.

A new round of Gaza ceasefire talks was underway in the Qatari capital Doha, as Palestinian health authorities said the death toll from the war surpassed 40,000 and pressure to end the war in the Palestinian enclave mounted.

The Russia-Ukraine conflict also kept prices elevated. Russia said on Thursday it would beef up border defenses, improve command and control, and send in additional forces, days after Ukraine made the biggest attack on its sovereign territory since World War Two.

Both main oil benchmarks had fallen more than 1% on Wednesday after US crude inventories increased unexpectedly.

US crude oil stockpiles rose by 1.4 million barrels in the week ended Aug. 9, compared with estimates for a 2.2 million barrel draw, building for the first time since late June.

China’s factory output growth slowed in July, while refinery output fell for a fourth month, underscoring the country’s spotty economic recovery and limiting the upside for crude markets on Thursday.

(Additional reporting by Noah Browning and Alex Lawler in London, Yuka Obayashi in Tokyo, and Trixie Yap in Singapore; Editing by David Holmes, Kirsten Donovan, and David Gregorio)

US rate cuts in view after tame CPI report

The prospect of looming US rate cuts was back on the front burner after an inflation report, which had kept markets on edge ahead of its release, showed a tame reading.

Wednesday’s consumer price index showed a moderate rise in July with the annual increase in US inflation slowing below 3% for the first time in nearly 3-1/2 years.

Following the July CPI data, the question investors seemed to be debating was not whether the Fed would cut rates at its Sept. 17 to 18 meeting, but by how much. Traders appeared to be leaning toward a more modest 25 basis point cut, but 50 bps was not ruled out. Nearly 40% odds were put on the bigger cut in September, according to CME FedWatch. The Fed’s annual Jackson Hole gathering, set for Aug. 22 to 24, will give Chair Jerome Powell a chance to fine-tune his rates message ahead of the meeting.

Much more US economic data also will arrive in the coming weeks, starting on Thursday with the monthly retail sales report and the weekly jobless claims data. The reports are likely to receive even greater scrutiny given the weak employment data at the start of August that sparked some concerns about a potential recession.

That employment data also was a catalyst for a bout of severe volatility and equity downside to start August, but markets seemed to be moving further and further from those wild swings.

The S&P 500 ended up 0.4% on Wednesday after the tame CPI report, with the benchmark index now down less than 4% from its all-time high reached in July. The Cboe Volatility index continued to recede, ending at just over 16 on Wednesday after shooting above 65 on Aug. 5.

In another sign of revived animal spirits on Wednesday, candy giant Mars was set to buy Cheez-It maker Kellanova for nearly USD 36 billion, in the year’s biggest deal to date.

Rate cuts were gripping other regions as well. New Zealand’s central bank slashed its benchmark rate for the first time since March 2020 and flagged more cuts over coming months.

Elsewhere, GDP data was expected on Thursday for Japan, as investors in the country were still digesting news that Prime Minister Fumio Kishida will step down in September.

Meanwhile, China is set to release a spate of data, including retail sales. A number of gloomy reports have dulled expectations for China’s economic performance in July.

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

– China industrial output, retail sales (July)

– Japan GDP (Q2)

– US retail sales (July)

(Reporting by Lewis Krauskopf; Editing by Josie Kao)

Dollar softens against euro as inflation data shows cooling

The dollar softened against its major peers on Wednesday, helping the euro to a near eight-month peak, as the US consumer price index showed inflation is subsiding, reinforcing expectations that Federal Reserve interest rate cuts are near.

US CPI rose moderately in July and the annual increase in inflation slowed to below 3% for the first time since early 2021, adding to expectations for a rate cut next month, though likely less aggressive than markets hoped for.

The report adds to the mild increase in producer prices in July suggesting that inflation is on a downward trend. This should give the Fed room to focus more on the labor market amid growing concerns of a sharp slowdown.

“It mildly shrank the expectations of targeting a 50-basis point rate cut in September,” said Amo Sahota, director, Klarity FX, in San Francisco. “It’s been a much quieter reflective approach on the inflation number.”

The euro EUR= was last up 0.18% against the greenback to USD 1.1014, surpassing the high hit during the market turmoil last week, and was trading at its strongest level since Jan. 2. The dollar index =USD was slightly lower at 102.57.

Traders had been widely expecting a rate cut in September before the producer price data, and ramped up bets for a 50 basis-point cut after the release to 56% from 53% a day earlier, according to CME Group’s FedWatch Tool.

Sahota thinks the market is still on track for three 25 bps cuts this year from the Fed, rather than 100 bps by the end of the year.

STERLING DIPS, KIWI SLIDES

Sterling failed to gain on the weaker dollar and was down 0.29% at USD 1.2825 after data showed the rise in British consumer price inflation was smaller than expected in July as services prices – closely watched by the Bank of England – rose less rapidly.

The pound did soften on the euro, however, which was up 0.47% at 85.87 pence. Financial markets priced in a 44% chance of a quarter-point BoE rate cut in September, up from 36% before the data was released.

The kiwi was down 1.28% at 0.5999, after the Reserve Bank of New Zealand reduced the cash rate by a quarter point, its first easing since early 2020 and coming a year earlier than its own projections.

Meanwhile, Japanese Prime Minister Fumio Kishida’s decision to not run for reelection in his party’s leadership race next month had little effect on markets, analysts said.

The yen was last trading at 147.26 against the dollar.

“The Fed is cutting rates. That should be dollar negative,” said Vassili Serebriakov, FX strategist, at UBS. “The currency that’s probably still likely to do the best against the dollar is the yen. The Bank of Japan is raising rates, and that also contributes to the narrowing of rate differentials.”

(Reporting by Laura Matthews in New York; additional reporting by Kevin Buckland in Tokyo and Sruthi Shankar in Bengaluru; Editing by Ana Nicolaci da Costa, Emelia Sithole-Matarise, Jonathan Oatis, and Chizu Nomiyama)

Wall Street fear gauge in record retreat after last week’s massive spike

NEW YORK – Wall Street’s most-watched gauge of investor anxiety is continuing its speedy retreat from panic levels, suggesting that investors may be returning to strategies that bank on low stock volatility despite a near-meltdown in equities early this month.

The Cboe Volatility Index slipped to 16.31 on Wednesday, its lowest level since the beginning of the month. The index hit 65 on Aug. 5 and closed at a four-year high of 38.57 on that day as investors roiled markets by unwinding several massive positions such as the yen-funded carry trade.

If the index’s level holds into the close, the seven trading sessions it took the VIX to return to its long-term median of 17.6 will be the index’s quickest-ever drop from 35, a level associated with a high degree of fear. Similar reversions in the so-called fear gauge have, on average, taken 170 sessions to play out, according to a Reuters analysis.

Some options mavens believe the rapid retreat in the so-called fear gauge signals investors have returned to strategies that bank on markets remaining calm to deliver profits. Among those is the dispersion trade, in which investors seek to take advantage of the difference between index-level volatility and volatility in single stock options, analysts said.

“What we saw (on Aug. 5) was a unique confluence of events,” said Steve Sosnick, chief strategist at Interactive Brokers. “I think it’s also quite remarkable how quickly everyone reverted to the same playbook that has been working for them once it was established that those events appear to be temporary.”

The S&P 500 has risen 5% from its Aug. 5 closing level while the tech-heavy Nasdaq Composite is up 6% from that day’s close. Both indexes are up about 14% on the year.

The sharp retreat in the VIX also backs the idea that last week’s record jump was fueled by technical factors rather than longer-term angst over global growth, analysts said.

The VIX, which is calculated from S&P 500 options quotes in real-time, may have been driven up excessively due to lower liquidity in pre-market hours on Aug. 5, according to market participants.

The sudden break from months of stock market calm may have also jolted some investors who had piled into various options-based bets on continued market calm to rush to exit those positions, further amplifying the VIX surge.

“It was much more about market structure issues … it was about short volatility traders being forced to close out when things had gone up against them, and it really wasn’t about a real fundamental shock,” said Michael Purves, head of Tallbacken Capital Advisors.

“If we had a fundamentally driven VIX spike because something really bad was happening in the economy or world, then you wouldn’t see this type of plunge in the VIX from that high level,” Purves said.

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and David Gregorio)

Yields mixed after CPI supports 25 bp Sept cut, with 50 bp not ruled out

NEW YORK – Benchmark US Treasury yields slipped on Wednesday after a benign July US consumer inflation reading appeared to smooth the way for a Federal Reserve easing next month of at least 25 basis points amid lingering division over whether 50 bps is in the offing.

The yield on the 10-year note, along with the two-year yield, initially ticked higher after the Labor Department reported its Consumer Price Index increased 0.2% last month after falling 0.1% in June, and increased 2.9% year-on-year. That was less inflationary than June’s 3.0% annual advance and the first time the rise has been below 3% since early 2021.

Economists polled by Reuters had forecast the CPI increasing 0.2% on the month and 3.0% over 12 months.

The odds of a rate cut at the Fed’s Sept. 17 to 18 policy meeting had been nearly split between half a percentage point and 25 bps. Futures moved in favor of a 25 bps cut after the report, with odds at 64.5% according to LSEG calculations.

The 10-year yield eventually eased below Tuesday’s low following the news of a mild increase in July producer prices. Two-year yields held steady.

“The market is thinking that inflation is a little bit more sticky than the Fed was expecting, and they’re penciling out some of that 50 basis point pricing,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York.

“Other than that, I think this really checks the box for the Fed to go in September. And of course, the big question for the market is going to be 25 or 50, and I suspect that’s going to be determined over the next couple of weeks.”

Traders are still pricing in a full percentage point of easing from the current 5.25% to 5.5% fed funds rate by year-end. The policy rate has not changed since July 2023, after the Fed hiked from zero starting in March 2022.

Lou Brien, market strategist at DRW Trading in Chicago, said that historical analysis based on last Friday’s surprise news of the unemployment rate rising to 4.3% suggested that 5% unemployment could be in the cards by the Dec. 6 release of November’s employment report.

From a risk management standpoint the Fed should go with 50 bp in September, if fed funds are to fall by 100 bp over the remaining three meetings in 2024, he posited.

“The (CPI) data was pretty benign and I don’t think it gets in the way of the Fed making a move in September,” he said. “I still advocate that the Fed should be more aggressive at this stage of the game because of where the unemployment rate is.”

The yield on the benchmark US 10-year note fell 2.6 basis points from late Tuesday at 3.828%. The 2-year note yield, which typically moves in step with interest rate expectations, was up 1.2 basis points to 3.9537%.

The 30-year bond yield fell 4.6 basis points to 4.1214%.

The closely watched gap between yields on two- and 10-year Treasury notes US2US10=TWEB, considered a gauge of growth expectations, was at negative 12.8 bps, slightly more inverted than its reading of -9.2 bps late Tuesday. An inverted yield curve is generally seen as pointing to a recession.

Hopes of an aggressive 50 bps easing in September briefly shifted the gap between 2- and 10-year yields to a positive 1.5 bps last week, the first time the curve showed a more normal upward slope since July 2022.

(Reporting by Alden Bentley; editing by Jonathan Oatis and Josie Kao)

US junk debt investors cautious of leveraged loans as economy slows

Leveraged loan deals are expected to pick back up after a stabilization in markets over the past week, although some investors say they are cautious about junk-rated loans if the economy weakens.

Borrowers pulled back on leveraged loan deals last week, following disappointing jobs data on Aug. 1 and Aug. 2 that raised forecasts for aggressive interest rate cuts and spurred concerns about lower-rated debt.

A total of six leveraged loans worth USD 3.3 billion were sold last week, which falls well short of the USD 10 billion weekly average this year and is the worst week for issuance outside the holiday-shortened first week of July, according to PitchBook LCD data.

One junk-rated loan deal sold on Monday, airline JetBlue Airways’ JBLU.O five-year term loan, according to PitchBook LCD. JetBlue originally sought a USD 1.25 billion loan, but downsized it to USD 750 million and upsized its bond offering to USD 2 billion from USD 1.5 billion, according to Informa Global Markets. JetBlue did not immediately respond to a request for comment.

At least two leveraged loan deals hit the market on Tuesday, including a USD 160 million add-on to virtual dataroom Datasite’s cross-border term loan and a USD 253 million repricing of for-profit education operator Adtalem Global Education’s ATGE.N term loan, according to PitchBook. Datasite and Adtalem did not immediately respond to a request for comment.

Lower rates can be good news for highly indebted companies.

“There’s no doubt if the Fed ends up cutting more as is priced in currently, that’s going to be a big relief for (those) borrowers,” said Hans Mikkelsen, credit strategist at TD Securities.

“But (investors) can now expect to earn less going forward because of that, (and) there’s going to be less availability of financing in the leveraged loan market (as a result),” he said.

Leveraged loan funds reported USD 3.1 billion in outflows last week, which is the most since March 2020, according to JPMorgan. That includes a record USD 2.4 billion outflow from exchange-traded funds.

The Morningstar LSTA US Leveraged Loan Index fell 0.55% on Aug. 5, the worst daily performance for the index since the collapse of Silicon Valley Bank in March 2023. The index has since clawed back these losses.

“For leveraged loans, a wave of volatility did throw a wrench into the works for the loan primary… forcing several opportunistic transactions to the sidelines,” said Marina Lukatsky, global head of credit research at Pitchbook.

These included deals for investment firm Focus Financial Partners, theme park owner SeaWorld Entertainment (owned by United Parks & Resorts Inc.), and wireless provider SBA Communications, according to Lukatsky. The companies did not immediately respond to a request for comment.

“I think we will see a pickup in primary issuance in both markets,” said Jeremy Burton, portfolio manager for US high yield and leveraged loans at PineBridge Investments.

“In the loan market, there were a number of repricings (and) refinancings that were either pulled or just didn’t launch…we could see some of those comeback,” he said.

A gap between net loan supply and investor demand since the Fed began hiking rates in 2022 should sustain demand for new loan deals through the end of this year, according to Lukatsky. She estimated that investor demand this year exceeded net loan supply by at least USD 130 billion as of July 31.

But heading into 2025, further signs of an economic slowdown and aggressive Fed rate cuts could prove detrimental to certain leveraged borrowers’ refinancing or new loan plans.

“Getting away from (last) week, I think investors will be focused on the potential for a slowing in the economy,” said PineBridge’s Burton.

(Reporting by Matt Tracy; editing by Megan Davies, Shankar Ramakrishnan and Chizu Nomiyama)

Oil prices settle 1% lower after surprise rise in US crude stockpiles

HOUSTON – Oil prices settled 1% lower on Wednesday after US crude inventories rose unexpectedly and as worries eased slightly that a wider Middle East conflict could threaten supplies from one of the world’s major regions for crude production.

Brent crude futures closed 93 cents lower, or 1.15%, at USD 79.76 a barrel. US West Texas Intermediate crude futures fell USD 1.37, or 1.8%, to USD 76.98 per barrel.

US crude inventories rose by 1.4 million barrels, compared with estimates for a 2.2 million barrel drop, data from the US Energy Information Administration showed. The build was the first after six straight weeks of draws.

“That six-week draw was pretty impressive but that’s in the rearview mirror. The fact that we snapped the streak should weigh on prices a little bit,” said Robert Yawger, director of energy futures at Mizuho in New York.

Gasoline and distillate inventories fell more than expected.

American Petroleum Institute figures on Tuesday pointed to a 5.21 million barrel drop last week.

Brent had risen more than 3% on Monday to cap a five-day run of gains, closing at USD 82.30 a barrel, after hitting a seven-month low of USD 76.30 at the beginning of last week.

Iran had vowed a severe response to the killing of the leader of Hamas late last month. Three senior Iranian officials have said that only a ceasefire deal in Gaza would hold Iran back from direct retaliation against Israel for the assassination.

Israel has neither confirmed nor denied its involvement, but it is fighting in Gaza against Hamas after the group attacked Israel in October. To counter Iran, the United States Navy has deployed warships and a submarine to the Middle East.

“Tighter supplies (from geopolitical tensions) are well priced in,” said Dennis Kissler, senior vice president of trading at BOK Financial.

DEMAND WOES

Also hindering oil price gains, the International Energy Agency on Tuesday trimmed its 2025 estimate for oil demand growth, citing the impact of a weakened Chinese economy on consumption. That came after OPEC cut expected demand for 2024 for similar reasons.

A recent string of dismal indicators have dulled expectations for July economic performance in China, feeding worries about the world’s second-largest economy.

Globally, jet fuel demand is also poised to soften as a slowdown in consumer spending hits travel budgets, a shift that could weigh on oil prices in coming months.

“Summer driving season is having its last hurrah, with schools returning and Labor Day fast approaching,” said Kpler analyst Matt Smith.

US consumer prices rose moderately in July and the annual increase in inflation slowed to below 3% for the first time since early 2021, strengthening expectations the Federal Reserve will cut interest rates next month.

Lower interest rates can boost economic activity and oil demand.

British consumer price inflation picked up less than expected in July, boosting rate-cut bets.

Providing a floor for crude prices, Libya’s Waha oil company’s production was reduced by 115,000 barrels per day due to maintenance on the pipeline pumping oil from the Waha field to Es Sider port, a company source told Reuters on Wednesday.

(Reporting by Arathy Somasekhar in Houston, Paul Carsten in London, Laila Kearney in New York, and Emily Chow in Singapore; Additional reporting by Arunima Kumar in Bengaluru; Editing by Emelia Sithole-Matarise, David Holmes, and David Gregorio)

Markets shake off volatility, but will it last?

Markets have bounced back nicely from the recent volatility, and it’s becoming clearer each day that the recent turbulence was likely due to the unwinding of large leveraged positions, like yen-funded carry trades, rather than deeper concerns about global growth.

Now, everyone’s eyeing Wednesday’s US inflation report, which could test the market’s new calm.

The July CPI numbers might not show much improvement from the previous month, but as long as there isn’t a big surprise, investors might still hope for the Fed to start easing in September.

Futures markets currently show a 54% chance of a 50 basis point cut by the Fed, with a 46% chance of a 25 basis point cut, and traders are pricing in a full percentage point of easing by year-end.

Keeping these expectations intact might be key to not scaring away investors’ risk appetite just as Japanese shares have rebounded after last week’s violent selloff. Japan’s Nikkei rose more than 3% following a holiday on Monday.

Ahead of the CPI report, the mood on Wall Street was upbeat, with the S&P 500 and Nasdaq Composite both continuing to rebound from recent dips. US Treasury yields slipped as data revealed that US producer prices rose less than expected in July, which supports the case for the Fed to cut rates in the coming months.

Meanwhile, Brent and US crude oil futures dipped on Tuesday as the market perceived a reduced risk of a broader conflict in the Middle East.

Investors will also keeping an eye on New Zealand’s central bank, which might cut interest rates on Wednesday, a full year ahead of its previous guidance. Slowing inflation, rising unemployment, and sluggish economic growth have led investors to bet on this easing move.

India’s wholesale price data will also be in the spotlight, as investors are eager to see if inflation slowed in July after climbing in recent months. Notably, India’s retail inflation dropped in July to its lowest level in nearly five years, according to government data released on Monday.

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

– Reserve Bank of New Zealand meeting

– India Wholesale Price Index (July)

– US Consumer Price Index (July)

(Reporting by Saqib Iqbal Ahmed; Editing by Josie Kao)

Yields fall after benign producer inflation data tees up CPI

NEW YORK – US Treasury yields declined on Tuesday after the release of a tame producer prices report that looked unlikely to divert the Federal Reserve from an easing path, with Wednesday’s consumer prices data set to fill out the inflation picture.

The July Producer Price Index increased a less-than-expected 0.1%, after rising 0.2% in June, the Labor Department said, as a rise in the cost of goods was tempered by cheaper services. In the 12 months through July, the PPI increased 2.2%, backing down from a 2.7% rise in June.

Vail Hartman, US rates strategist at BMO Capital Markets in New York, said CPI and PPI are not highly correlated and the market took the data in stride. PPI should not throw the Fed off course because parts of it contribute to the Personal Consumption Expenditures price index, which the Fed relies on most to guide policy, he said.

“Just looking at the PPI data, and specifically the elements that feed into core PCE, I don’t think there was anything truly alarming and, from a broader perspective, I think the data conforms with the disinflation narrative.”

The report also sent stocks soaring and the dollar lower.

Slowing inflation and a cooling labor market have led financial markets to anticipate that the Federal Reserve will start its easing cycle in September. With inflation behaving and the unemployment rate surging to near a three-year high of 4.3% in July, an interest rate cut of 50 basis points from its current 5.25% to 5.50% range cannot be ruled out.

The July Consumer Price Index is due at 8:30 a.m. EDT (1230 GMT) on Wednesday. Thursday also brings indicators such as retail sales and weekly jobless claims. Claims have taken on more importance recently because of the Fed’s scrutiny of labor market conditions.

“The market is hoping they confirm slowing in the economy that will also give the Fed more excuse to cut rates,” said Kim Rupert, managing director, fixed income at Action Economics in San Francisco.

Futures markets reflect odds of about 54% that the Fed will cut 50 bps against 46% for a 25 bps cut, a reverse from late Monday. Traders are pricing in a full percentage point of easing by year-end.

Atlanta Fed President Raphael Bostic on Tuesday said unemployment is still historically low and the labor market was strong, predicting a rate cut by year-end.

Speaking at an event in Atlanta, Bostic noted that the balance of risks between inflation and the job market are closer to level, but he wants to be sure the Fed avoids cutting rates too soon.

Bond yields fell sharply to their lowest in more than a year in the wake of the surprising jump in the unemployment rate and weaker-than-expected payrolls increase reported last Friday.

They have recovered somewhat but remain under pressure amid concerns that confidence about a soft landing may be excessive and that a recession could be in store.

The yield on the benchmark US 10-year note fell 5.5 bps to 3.854%, about 4 bps below where it stood before PPI.

The 2-year note yield, which typically moves in step with interest rate expectations, fell 7.1 basis points to 3.9439%, most of which came after the report.

With the two-year unable to hold back above 4% this week, Rupert said: “Shorts are throwing in the towel again, so the little rally is feeding on itself to some extent.”

The 30-year bond yield fell 3.2 bps from late in the previous session to 4.1656%.

The closely watched gap between yields on two- and 10-year Treasury notes, considered a gauge of growth expectations, was at negative 9.2 basis points, slightly steeper, or less inverted, than its reading of -11.7 bps late Monday. An inverted yield curve is generally seen as a pointer to a recession.

Hopes of an aggressive 50 bps easing in September briefly shifted the gap between 2- and 10-year yields to a positive 1.5 bps last week, the first time the curve had shown a more normal upward slope since July 2022.

The breakeven inflation rate on five-year Treasury Inflation Protected Securities (TIPS) rose to about 1.99% from 1.98% late Monday, indicating that investors see annual inflation averaging less than 2% over the next five years.

The breakeven inflation rate on 10-year TIPS rose to 2.1158% from 2.11%.

(Reporting by Alden Bentley; editing by Jonathan Oatis and Nick Zieminski)

Dollar weakens as markets await US consumer price data

NEW YORK – The dollar softened against the yen on Tuesday and was weaker against a basket of its peers in calmer trading, as markets await US inflation data that could indicate the outlook for Federal Reserve interest-rate cuts.

Dollar/yen weakened after data showed US producer prices increased less than expected in July as a rise in the cost of goods was tempered by cheaper services, indicating that inflation continued to moderate. Treasuries rallied, pushing yields lower after the PPI report.

The more closely watched consumer price index report on Wednesday will also help guide the Fed’s interest-rate policy.

“Today’s PPI release has definitely been taken as promising news for markets,” said Helen Given, associate director of trading at Monex USA. “Traders are treating this as sort of a prelude to tomorrow’s CPI, which markets have been bracing for as a possible volatility event after last month’s reading showed prices actually went down.”

Currency markets have been rocked by a sharp rally in the yen since July that has prompted – and been driven by – an unwinding of a popular investment strategy called the carry trade and contributed to a slide in stocks.

Yet, with the dollar down 0.35% against the yen at 146.71, markets on Tuesday appeared to be over the worst of the recent turbulence.

The yen slid to 38-year lows in July as investors piled into the carry trade, in which they borrow yen in Japan where interest rates are low, then sell it for other currencies to buy higher-yielding assets elsewhere.

A number of factors, particularly a surprise rate hike by the Bank of Japan and expectations of US rate cuts due to a slowing labor market, have combined to reverse the carry trade stampede, leaving the yen up around 8% since mid-July.

Government sources told Reuters on Tuesday that Japan’s parliament plans to hold a special session on Aug. 23 to discuss the central bank’s decision last month to raise rates.

“The market wants to test what the appetite is for it to go higher. The reality is the rate spread between US and Japan is still going to be very wide,” said Amo Sahota, director, Klarity FX.

“The market has been oversold very quickly, but now it’s trying to get itself back to neutral. I think it’s treading very carefully, dipping their toes back into the water again, and seeing what the current is like.”

The dollar index fell 0.5% to 102.56, with the euro up 0.61% at USD 1.0999.

POUND PERKS UP

Sterling rose 0.81% to USD 1.2869, with data earlier in the session showing the UK’s jobless rate fell to 4.2% in June from 4.4% in May, defying economists’ expectations of a slight rise. Job vacancies declined while wage growth slowed.

Low survey response rates have recently caused investors and economists to put less weight on Britain’s labor market data.

“Last weekend’s panic spiral around the potential for a hard landing looks at this point like it was quite overblown, and markets look to be moving back toward stability,” Given said. “Any downside surprise on CPI, as we got this morning on PPI, is likely to have a greater effect on USD and move the buck into further negative territory.”

(Reporting by Laura Matthews in New York; additional reporting by Harry Robertson in London, Wayne Cole in Singapore; Editing by Sam Holmes, Sharon Singleton, Susan Fenton, Paul Simao, and Rod Nickel)

2024 Mid-Year Economic Briefing: Navigating the Easing Cycle

Investing with Love: A Mother’s Guide to Putting Money to Work

Investor Series: An Introduction to Estate Planning

Inflation Update: Prices rise even slower in May

Monthly Recap: BSP to outpace the Fed in rate cuts