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A look at the day ahead in U.S. and global markets from Mike Dolan Relief at the resumption of disinflation triggered the best day for U.S. stocks and bonds since the spring as Fed rate hike bets evaporated, eyes turned to softening retail numbers and a long-feared government shutdown was averted until next year at least.
Encouraging the new found optimism overnight was a surprisingly large drop in outlying British inflation too, with forecast-beating Chinese industrial and retail numbers calming nerves about a deflationary bust there just ahead of President Xi Jinping's meeting U.S. President Joe Biden on Wednesday.
Wall Street stocks are on course for the best month of the year, with the S&P500 staging its biggest one-day gain since April and pulling the index back up to September levels.
Reflecting the disproportionate exposure of smaller firms to higher borrowing costs, the Russell 2000 index of small caps clocked its best day in over a year and rallied 5%.
With October retail sales data later in the day expected to show a stalling of red-hot high street activity into the final quarter, the warm glow of ebbing inflation and cresting borrowing costs continued early Wednesday and S&P500 futures were up another 0.25% ahead of the bell.
But the real action over the past 24 hours was in rates and bond markets, where 2- and 10-year Treasury yields plummeted around 20 basis points each in their steepest one-day drops since the regional banking shock in March and sustained most of that move overnight. Much like then, the sheer scale of the yield swoon has stoked bond volatility gauges too.
The positive surprise in sub-forecast U.S. headline and core inflation rates for last month and encouraging momentum on disinflation at large has seen futures market remove virtually all bets on another Federal Reserve rate hike in the cycle.
What's more, a quarter point rate cut by May is now 80% priced and 100bps of easing through 2024 is now baked in.
Overreaction? The retail and producer price readouts later today will be the first reality check, but so too will be reactions from Fed officials to the latest numbers.
The relatively dovish Chicago Fed chief Austan Goolsbee on Tuesday trumpeted the makings of a spectacular soft landing for the economy - highlighting how the economy's on course for the biggest non-war-related one-year drop in inflation in a century and with the jobless rate still below 4%.
Wall St banks too seem to be falling into line. Bank of America is the latest to say it no longer sees another hike.
And will crude oil prices still on the backfoot and declining at a 10% year-on-year rate, the disinflation cheer spreads out across the world.