Marketmind: A half or three quarters?

A look at the day ahead in markets from Sujata Rao

The bond selloff triggered by last week’s May consumer inflation print got fresh legs on Tuesday when U.S. factory gate inflation or PPI was revealed to have increased by 10.8% last month; higher gasoline prices comprised 40% of the rise in goods costs.

Given that producer prices usually front-run CPI by a few months, the notion that inflation may have peaked is out of the window, alongside hopes the Federal Reserve could pause its rate hike campaign in September.

Instead, markets are braced for a 75 basis-point move later on Wednesday, with the possibility of more such moves at several upcoming of the coming meetings.

That kind of hike is by no means a done deal. The Fed which has signalled a half-point move, would find its credibility dented.

What’s more U.S. financial conditions, per an index compiled by Goldman Sachs, have tightened 100 basis points in June, the most since the pandemic-time months. Effectively, that could be already doing the Fed’s work for it.

While markets settle in to wait, there are other things to chew over. The blowout in bond yields, especially in euro zone weak link Italy, seems to have fuelled panic at the European Central Bank which will hold an emergency meeting on Wednesday

Reuters explored some of the options open to the ECB in this article. But the very news of the meeting has lifted markets, with Italian two-year yields — and their premium over the German equivalent — already down 20 basis points. And the euro has jumped 0.5%

U.S. Treasury yields too are off their highs.

On stock markets, European bourses are opening firmer and U.S. equity futures are up. Asian shares mostly took their cue from Wall Street’s weak close, with the exception of China where shares jumped 2.5%, thanks to retail sales figures that were slightly better than forecast.

Key developments that should provide more direction to markets on Wednesday:

-Bank of Iceland meets

-NATO Defence ministers meet

-ECB speakers: Christine Lagarde, Joachim Nagel, Klaas Knot, Pablo Hernandez de Cos of Spain

-U.S retail sales/inventories/housing

-U.S. Fed rate announcement

-Central bank meetings in Brazil and Mexico

(Reporting by Sujata Rao; editing by)