Morning Bid: Markets to Fed: We'll take five to go, please

Market Reactions to Federal Reserve Policies

(Reuters) -A look at the day ahead in European and global markets from Wayne Cole.

Well, that was a relief. U.S. CPI was on the firmer side but not so much that you'd notice. Some of the prices that feed into core PCE were surprisingly benign, leading analysts to trim their forecasts to +0.2% m/m and a steady 2.9% on the year.

So it's all go for the Federal Reserve to resume its easing cycle with 25 basis points next week, though it's notable markets see just a 7% chance of a bumper 50bps.

Impact on Borrowing Costs

You would assume the more aggressive option will be discussed given the sheer scale of the downward shift in the labour market data. If it's 25 but a voter or two dissents in favour of 50, that might be dovish enough to keep the market rally going.

Global Market Trends

The guidance needs to be dovish given futures have shifted to pricing in 71bps of cuts by Christmas, and 125bps by July. Five cuts in five meetings would be fine. Oh, and a plea to the Fed, please go back to a single rate and not this 4.25-4.50 range. We're not at the zero-bound anymore.

Bonds have already delivered a quarter-point cut to mortgage rates with 10-year yields down ~20bps in the past two weeks. To keep the rally going, investors need Fed Chair Jerome Powell to open the door to a series of easings, depending on the data, of course.

Anyway, the prospect of much lower U.S. borrowing costs has kept liquidity flowing in Asia and allowed investors to bet on all things AI. Indexes in Japan, South Korea and Taiwan have all hit record highs. The Kospi alone is up almost 6% for the week. Chinese blue chips are back to the peaks from early 2022, having so far survived Beijing's stern warnings against capitalist excesses.

The dollar has held up relatively well on the majors in the face of falling yields, while giving ground on some of the less crowded crosses. The dollar index is just a fraction lower on the week, despite all the talk of the end of exceptionalism.

The Australian dollar, for instance, finally escaped its soporific trading range to reach a 10-month top, while the Norwegian crown just reached its best level since early 2023.

Both have seen yield spreads vs the USD swing around 40 basis points in their favour in the past month or so, and both are testing huge chart levels.

Key Economic Indicators

Key developments that could influence markets on Friday:

- Appearances by Bank of Spain Governor Jose Luis Escriva and ECB policy maker Olli Rehn

- UK GDP and manufacturing output for July. Final readings on EU CPI

- US consumer sentiment for September

(By Wayne Cole; Editing by Muralikumar Anantharaman)