Morning Bid: Turning the corner in the inflation fight

A look at the day ahead in European and global markets from Rae Wee

Central bankers across the globe are finally showing increasing confidence that markets may be entering an era of lower rates, after victory over inflation proved elusive for a long time.

The Reserve Bank of New Zealand (RBNZ) said on Wednesday at the conclusion of its policy meeting that headline inflation is expected to return to within the 1% to 3% target range in the second half of this year – a markedly less hawkish tone than what was conveyed in May.

Traders wasted no time in ramping up bets for rate cuts in New Zealand later this year, which in turn sent the kiwi sliding some 0.7%.

The RBNZ decision comes a day after Federal Reserve Chair Jerome Powell said in remarks to Congress that the U.S. is “no longer an overheated economy” with a job market that has cooled from its pandemic-era extremes, even though he provided little clues on how soon an easing cycle could commence.

Still, the market pricing of an over 70% chance of a Fed cut in September has come a long way from a near-even chance a month ago, based on the CME FedWatch tool.

Powell returns to Capitol Hill later on Wednesday to testify before the House Financial Services Committee, though focus will likely be on Thursday’s U.S. inflation report.

A surprise spike there could throw the case for rate cuts into doubt.

Japan, meanwhile, remains an exception to the rate-cut story, with an acceleration in the country’s wholesale inflation in June keeping alive market expectations for a near-term rate hike by the central bank.

The Bank of Japan will likely trim this year’s economic growth forecast in July but project inflation will stay around its 2% target in coming years, sources told Reuters.

Rates aside, data on Wednesday showed China’s consumer prices grew for a fifth month in June but missed expectations, while producer price deflation persisted, as anaemic domestic demand continues to plague the world’s second-largest economy despite Beijing’s support measures.

China’s retailers have discounted goods, from cars to coffee, as they navigate through sluggish consumer spending amid a shaky economic outlook.

The downbeat data did little to help the yuan, which on Wednesday again fell to its weakest level since November.

Key developments that could influence markets on Wednesday:

– UK RICS Housing Survey (June)

– Reopening of 14-year German government debt auction

– Powell continues his testimony, this time before the House Financial Services Committee

(Editing by Muralikumar Anantharaman)