Marketmind: Great expectations

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

If reining in inflation expectations is the U.S. Federal Reserve’s main task, it can count the latest surveys as a tactical victory at least.

World markets go into Tuesday’s critical release of U.S. consumer price data for August with high hopes that inflation has already crested and is on the wane. Stock markets around the world edged higher and U.S. equity futures were set for further gains at the open. The dollar continued to ebb.

While consensus forecasts see headline annual inflation slip back further to 8.1% – a full percentage point below June’s peak – ‘core’ rates, excluding food and energy, are expected to tick higher again to 6.1% from 5.9%.

But hopes the Fed’s swingeing interest rate rises and the retreat in retail gasoline prices are changing households’ inflation outlook were given a boost from Monday’s release of the New York Fed’s latest survey of the public.

While a drop in the median 3-year inflation expectation to near two-year low of 2.8% last month won’t change forecasts for another 75 basis point Fed hike next week, it will give policymakers and markets some encouragement that the rate rises are working and moderate the extent of tightening needed.

As the Fed is also stepping up the pace of its balance sheet reduction, that optimism may be most important for the Treasury bond market – which saw lacklustre auctions of 3-year and 10-year debt on Monday and faces a 30-year bond sale on Tuesday. It was also a heavy day for sovereign debt sales in Germany, Italy and Japan.

The 25% drop in oil prices since midyear has been a big factor, but crude oil prices continued to edge back higher this week and Brent prices have firmed almost 10% since late last week on a variety of supply factors. Data released on Monday showed the U.S. Strategic Petroleum Reserve fell to its lowest since October 1984.

Still, stock investors were inclined to see the glass half-full for now, not least with portfolios already so light on equities.

Investor allocation to global stocks was at an all-time low for September, according to Bank of America’s monthly survey of fund managers around the world. Cash holdings were at a record high and ‘long dollars’ remained the world’s ‘most crowded trade’, it said.

Fears for a global recession were reinforced by dour September sentiment surveys from Germany and mixed picture from the British labour market in the three months to July.

The Organisation for Economic Cooperation and Development, meantime, said G7 economic output on aggregate contracted by 0.4% in the second quarter of 2022 already.

In banking, UBS said it plans to increase its dividend by 10% and expects 2022 share repurchases to exceed its $5 billion goal.

Goldman Sachs will cut jobs as early as this month after pausing the annual practice for two years during the pandemic.

Key developments that should provide more direction to U.S. markets later on Tuesday:

* U.S. August consumer price index

* U.S. Treasury auctions 30-year bonds

(By Mike Dolan; Editing by Muralikumar Anantharaman mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)