A look at the day ahead in U.S. and global markets from Mike Dolan
The U.S. economy is doing just fine and markets now accept a quarter-point rate cut from the Federal Reserve next month will be enough to get the easing cycle going as disinflation resumes.
That was the basic conclusion from a torrent of macro economic updates on Thursday that showed American shoppers in fine fettle, WalMart upping forecasts and jobless claims ticking lower.
It's not all clear skies and sunshine - some weakness persists in manufacturing and housing. But as inflation is returning to target, it allows the Fed to start taking its foot off the brake in September and underscore the decent expansion.
Despite the retail spending spree, the Atlanta Fed's 'GDPNow' real time estimate cooled to 2.4% growth for the current quarter from 2.9% previously. And U.S. and global economic surprise indexes remain in negative territory overall.
Overall, the updates have been enough to bat away thoughts of recession without removing Fed easing hopes.
The debate about whether the first cut will be a quarter or a half point seems settled for now and futures price just 30 basis points of cuts for next month - and just 61bps over the remainder of the year. There had been more than 100bps of 2024 cuts assumed at the start of the week.
The Fed's annual Jackson Hole symposium late next week now colors in the central bank's thinking and earnings from AI-bellwether Nvidia (NASDAQ:NVDA) on Aug 28 kick the tyres of the artificial intelligence theme.
Fed chair Jerome Powell speaks next Friday as Jackson Hole event gets underway.
But it's clear already that most Fed officials are prepared for easing to start next month, if only to prevent renewed disinflation lifting the real inflation-adjusted policy rate even further from 17-year highs.
"It now appears the balance of risks on inflation and unemployment has shifted ... the time may be nearing when an adjustment to moderately restrictive policy may be appropriate," St. Louis Fed President Alberto Musalem said on Thursday.
Srugging off its near heart attack early last week, Wall St seems to like the current constellation.
After Thursday's roaring stock rally, S&P500 futures are higher again on Friday and the index looks set to record its best week of the year with gains of almost 4%.
And Treasuries were only mildly put off by the reset of Fed expectations - with two-year yields returned back above 4% on Thursday and holding there early today. The dollar index firmed up in tandem.
Perhaps reflecting more sustainable times ahead, the negative daily correlation between stocks and bonds that's returned since Aug 1 has been sustained just as the VIX volatility index returns just below its historic median.
The overseas market mood was similarly ebullient, with Japan's Nikkei surging again on Friday - gaining more than 3% to record a spectacular weekly bounceback from Aug 5's yen-related turbulence that now ranks as its best week in more than four years.
Thursday's second-quarter GDP beat from Japan has helped and the yen easing back a bit.
Despite a more mixed economic picture in Europe - sapped in part by China's ongoing economic stumble - European stocks also caught Wall Street's slipstream on Friday to stay on track for their best week in three months.
Chinese stocks were firmer too after Thursday's interview with central bank governor Pan Gongsheng indicated the bank will will stick to a supportive monetary policy.
Sterling was an outperformer on currency markets after data showed British retail sales rebounded 0.5% in July, in line with expectations.
Next up stateside on Friday is July's housing starts report, with the corporate earnings diary thinning out.
In company news, Applied Materials (NASDAQ:AMAT) forecast fourth-quarter revenue slightly above estimates after the bell on Thursday, anticipating a surge in AI-fueled demand for its chip-making equipment.
But shares of the Santa Clara, California-based company were down 2.8% in extended trading after having closed about 5% higher on Thursday.
Key developments that should provide more direction to U.S. markets later on Friday:
* US July housing starts and permits, University of Michigan August household survey
* Chicago Federal Reserve President Austan Goolsbee speaks
* US corporate earnings: Campbell Soup (NYSE:CPB)
(By Mike Dolan, editing by Philippa Fletcher; mike.dolan@thomsonreuters.com)