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

The glass appears half full at half time.

The U.S. economy and markets look to be in rude health as they hit the midyear mark on Friday, with both stock prices and interest rates climbing in tandem and the dollar on the rise.

U.S. jobless claims posted their biggest drop in 20 months last week, first-quarter economic growth was revised higher and inflation below forecast. The Federal Reserve’s favoured PCE inflation gauge for May is due for release later.

Only Nike’s forecast miss on downbeat sportwear sales, which knocked its shares 4% after hours, acted as a domestic cloud.

The constellation of resilient growth, a tight labour market, buoyant consumer confidence and a rebounding housing market are pushing back recession fears despite sharply rising interest rates that the Fed is signalling could rise twice more.

The banking stress of the spring has been put aside, with financial stocks climbing again this week as the major banks easily passed mid-year stress tests.

The sheer stamina of the economy is lifting both stocks and bond yields, with the added tech excitement of the year’s artificial intelligence boom.

The S&P500, up almost 15% so far in 2023, hit a near two week high again on Thursday and is set to advance. The small-cap Russell 2000, up 7% this year, is set for its best week since March.

But the tech-heavy Nasdaq has stolen the show in the first half, on track for a gain of more than 29% – the biggest such gain in 40 years.

And with ‘core’ annual PCE inflation expected to be as high as 4.7% last month – still more twice the Fed’s 2% target – futures are at last starting to believe the central bank’s clear signal of two more quarter-point rate rises this year.

Another hike next month is baked in and pricing now suggests almost a 50% chance of yet another move in the Fed’s policy to the 5.50-5.75% range by November. Two-year Treasury yields are homing in on 5%, hitting their highest on Friday since March 9 and up 30 basis points since early Tuesday.

The macro picture is not as rosy elsewhere, adding heft to the dollar’s fresh climb to two-week highs.

China’s factory activity declined for a third straight month in June and weakness in other sectors deepened, official surveys showed on Friday. The offshore yuan hit its weakest since Nov. 4 as pressure for lower domestic interest rates builds – in contrast to the U.S. direction of travel.

Below-forecast Japanese inflation readings also pressured the yen, which weakened to above 145 per dollar for the first time this year even amid government warnings against excessive lurches.

And even though euro zone inflation for June came in below forecast for June, German joblessness rose more than expected during the month. Britain underlined a weak start to the year for its economy.

In emerging markets, the International Monetary Fund reached a staff-level pact with Pakistan on a $3 billion stand-by arrangement that may pull it back from the brink of default.

Events to watch for later on Friday:

* U.S. May personal income, spending and PCE inflation gauge. Dallas Fed PCE. Chicago June PMI business survey, University of Michigan’s final June confidence number

* European Union summit in Brussels

* U.S. corporate earnings: Constellation Brands

(By Mike Dolan, editing by XXXX mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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