A look ahead to the coming days in the US and global markets by Mike Dolan

With inflation under control and market volatility back on track, we could well see another lull in summer trading if US retail activity holds steady later Thursday.

The extraordinary tour of Wall Street’s VIX volatility indicator more or less came to an end on Wednesday, as a favorable U.S. consumer price report reinforced speculation that the Federal Reserve will begin easing monetary policy next month – although this will more likely be a quarter-percentage point rate cut rather than a half.

The VIX closed at just 16.2 on Wednesday, taking just seven trading days to fall back below its historical median after a brilliant close of 38.6 on August 5.

To put the speed of this reversal in context, historically it has taken an average of 170 sessions for the index to fall back below the median after closing above 35. This makes the early August episode more comparable to the brief “Volmageddon” turmoil of early 2018 than to any more permanent and damaging disruption.

All this puts the markets back on a more solid footing, which remains reasonably stable even ahead of another flood of US economic reports late Thursday.

Both this week’s consumer price index (CPI) and the previous producer price report give the Fed the green light to start cutting interest rates next month. Longer-term signals will now be on the radar from its annual symposium in Jackson Hole next week.

While rent numbers remain a concern—and some believe a Fed rate cut might actually help—the annualized Consumer Price Index (CPI) for the past three months is now well below the Fed’s 2 percent target on both a headline and core basis.

CHINA’S REAL ESTATE SECTOR

While futures have priced in a quarter-point cut for September, there is now only a one in three chance that the Fed will opt for a 50 basis point cut. However, 100 basis points are still possible by the end of the year and almost 200 basis points by next June.

Atlanta Fed President Raphael Bostic told the Financial Times on Thursday he was open to a rate cut in September, adding that the Fed could not afford to be “late” in easing its policy.

The story continues

Although they rose slightly on Thursday, US Treasury yields are subdued, with two-year yields still below 4%. And after the S&P500 posted its best close of the month on Wednesday, futures on the major stock indices are trading higher again before the start of trading.

The dollar continues to retreat even as the euro has fallen from its 2024 high of over $1.10, as continued troubling Chinese economic news also causes unrest in Europe.

While Chinese industrial and retail reports for July were mostly mixed, the big problem remains the struggling real estate sector and Thursday’s data showed that new home prices in China fell at the fastest pace in nine years in July.

70 percent of Chinese household wealth is tied up in real estate, a sector that at its peak accounted for a quarter of the economy. As a result, consumers are keeping their wallets tightly closed in the face of falling property prices.

Hopes that recent economic news would raise the chance of further monetary easing supported Chinese stocks off six-month lows on Thursday, and the offshore yuan fell back. The central bank pumped money via a short-term bond instrument and said it would extend its medium-term lending facility later this month to expand liquidity support.

In contrast, the Japanese economy grew much faster than expected in the second quarter (3.1% annualized), recovering from a slump at the beginning of the year and suggesting another short-term interest rate hike. In Europe, the pound rose slightly after solid British GDP data for the second quarter.

However, global economic surprise indices are at their most negative level in more than two years.

Let’s get back to the day’s events on Wall Street. The most important part of the extensive economic data program is likely to be the July retail sales report and the still extremely sensitive weekly unemployment report.

WalMart gives the national retail total a corporate grade with its quarterly results.

Dow component Home Depot warned earlier this week of a decline in annual profit and an even bigger drop in annual sales as weak spending dampened expectations. But the company’s shares are helping nonetheless.

In terms of acquisitions, Kellanova shares rose 7.8 percent on Wednesday after family-owned candy giant Mars announced it would acquire the maker of Cheez-It and Pringles in a nearly $36 billion deal.

Key developments that should provide more direction to US markets later on Thursday:

* US weekly unemployment reports, retail sales and industrial production for July, NAHB housing market index for August, Philadelphia Fed business survey for August, NY Fed manufacturing survey for August, TIC data on Treasury flows for June

* St. Louis Federal Reserve President Alberto Musalem and Philadelphia Fed President Patrick Harker both speak

* US corporate earnings: Walmart, Amcor, Applied Materials, Deere, Tapestry, etc.

* US Treasury sells 4-week bills

(Written by Mike Dolan; editing by Alison Williams; [email protected])