Morning Bid: Markets reel on Fed cut doubts, ECB up next

NEW YORK: A look at the day ahead in U.S. and global markets from Mike Dolan.

It may seem like an over-reaction to an inflation miss of less than a tenth of a percentage point, but the heated March consumer price update has jolted markets into doubting any U.S. interest rate cut before the November election.

After much trepidation ahead of the report, the monthly rise in U.S. CPI rise was 0.359% - rounded up to 0.4%, compared to the 0.3% forecast. The rounded print would have been in line with expectations had the number come in less than one basis point lower.

To be sure, the narrative quickly focussed on stubborn rent rises and shelter inflation, spiky insurance costs and the third month in a row of a rounded 0.4% monthly gain in 'core' CPI inflation that kept annual core inflation stuck at 3.8%.

But the market reaction was dramatic - some might say over the top. Futures markets virtually wiped the chances of a June Federal Reserve rate cut off the map, see less than a 50% chance of move in July and now doubt there will be any more than one rate cut this year - despite Fed policymakers indicating as many as three only last month.

Minutes of that Fed meeting released later on Wednesday did little to calm the horses.

Perhaps most pointedly for those watching the political calendar, a first quarter-point Fed rate cut is now not fully in futures prices until the Nov 7 meeting - days after this year's White House and Congressional elections.

With the political optics around a first cut in September likely tricky for the Fed, futures only see about an 80% chance of a move then.

The CPI news knocked Wall St stock benchmarks, opens new tab almost 1% and triggered the biggest one-day jump in 2-year Treasury yields and biggest one-day jump in the dollar index, opens new tab since March last year.

The dollar move was exaggerated by the yen slicing through presumed Bank of Japan intervention barriers around 152 per dollar to hit its weakest since 1990 above 153 on Thursday - significantly without any sign of BOJ purchases.

And the fact that markets still see a 75% chance of a June rate cut from the European Central Bank - which is meeting on Thursday - despite the Fed futures wipeout, triggered the biggest one-day drop in over a year in the euro/dollar exchange rate too.

The fundamental reasons for the dollar move were pretty clear and it was the biggest daily surge in 10-year Treasury borrowing rates since 2022.

Coming in a week of heavy new debt sales at the long-end of the Treasury curve didn't help. And some $22 billion of 30-year bonds are up for grabs later on Thursday.

Investors will now focus on Thursday's producer prices report for a clearer picture of March inflation - looking at components in there that may give more clues on how the Fed's favored PCE inflation gauge is evolving.

A stream of Fed speakers will, perhaps literally, be watched like a hawk.

But whatever you think is driving the renewed inflation angst, it's certainly not happening in China.

China's annual consumer inflation cooled more than expected in March to just 0.1%, while producer price deflation persisted, maintaining pressure on policymakers to launch more stimulus there as demand remains weak.

Overall, Wednesday's market selloffs seem to calm a bit on Thursday. Treasuries hogged Wednesday's closes, even though Wall St stock futures were in the red again ahead of the bell - as were Asia and European bourses earlier.

More worrying for inflation-watchers was the overnight geopolitical developments.

Oil prices pushed higher again on Middle East tensions.

The German airline Lufthansa on Thursday extended the suspension of its flights to Tehran, with the region on alert for Iranian retaliation for a suspected Israeli air strike on Iran's embassy in Syria.

An Iranian news agency had published an Arabic report on the social media platform X saying all airspace over Tehran had been closed for military drills, but then removed the report and denied issuing such news.

The region and the United States have been on alert for a retaliatory attack by Iran since April 1, when Israeli warplanes were suspected of bombing the Iranian embassy compound in Syria.

Markets are also trying to focus on the start of the first quarter earnings season and a trio of big banks- JPMorgan, Citigroup and Wells Fargo - are slated to post results on Friday.

Analysts expect aggregate S&P 500 earnings in the first quarter to grow 5.0% from last year, according to LSEG data. That is lower than the 7.2% annual earnings growth for the quarter forecast on Jan. 1.

Key diary items that may provide direction to U.S. markets later on Thursday:

* European Central Bank policy decision and press briefing

* US March producer price index, weekly jobless claims

* Federal Reserve Bank of Boston President Susan Collins, New York Fed President John Williams, Richmond Fed chief Thomas Barkin and Atlanta Fed chief Raphael Bostic all speak

* US Treasury sells $22 billion of 30-year bonds

* US corporate earnings: Constellation Brands, Carmax, Fastenal

* Eurogroup finance ministers meet in Brussels