Inflation offers crumbs of comfort, big banks report

A look at the day ahead in U.S. and global markets

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

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This week's initial sweep of inflation readouts has calmed New Year market turbulence, but the main event is yet to come and it's harder to dispel concern about the rest of the year.

With the critical U.S. consumer price report for December due later on Wednesday, the advance soundings at home and abroad were somewhat encouraging - both U.S. producer price and British consumer price inflation for last month undershot forecasts.

And given both U.S. Treasuries and British gilts have been at the centre of this year's bond storm, this has offered crumbs of comfort to restive debt markets.

People shop in a supermarket as rising inflation affects consumer prices in Los Angeles, California, U.S., June 13, 2022. REUTERS/Lucy Nicholson

But there are no champagne corks popping yet. Impressive headlines aside, the details of the U.S. PPI were far more mixed and sticky components - such as air fares - may yet irk the Federal Reserve's favored PCE inflation gauge.

So that just spins everything back into the CPI release, with big U.S. banks kicking off the U.S. corporate earnings season before that hits later today.

The upshot for bonds is that 10-year Treasury yields have come off the boil, ticking back about 5 basis points from 14-month highs above 4.8% first thing on Wednesday. Fed futures are back comfortably pricing one more Fed rate cut this year, though hesitating at two.

And as night follows day, that's pulled the dollar index back lower too.

The less equivocal UK inflation data saw 10-year gilts outperform after their torrid start to 2025, offering considerable relief to a government wary of being forced to tighten fiscal policy again before its underlying growth priority materialises.

The 30-year gilt yield, the most alarming this year has pulled back up to 10bps from the 27-year highs it set on Monday.

Despite the implications for Bank of England easing, the pound seems to have held the line.

Curiously, Britain's banks have resisted upping mortgage rates into the gilt jolt. Many are accepting smaller profit margins and bigger risks on UK mortgage lending despite a tightening of sterling money markets - with their appetite to lend greater than worries about higher funding costs.

For U.S. stock markets starting to turn heads to the earnings season, the bond stabilisation has given some solace.

The S&P500 edged higher on Tuesday, with the small cap Russell 2000 outperforming. Futures are up marginally ahead of the bell.