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

This week’s initial sweep of inflation readouts has calmed New Year market turbulence, but the main event is yet to come and it’s harder to dispel concern about the rest of the year.

With the critical U.S. consumer price report for December due later on Wednesday, the advance soundings at home and abroad were somewhat encouraging – both U.S. producer price and British consumer price inflation for last month undershot forecasts.

And given both U.S. Treasuries and British gilts have been at the centre of this year’s bond storm, this has offered crumbs of comfort to restive debt markets.

But there are no champagne corks popping yet. Impressive headlines aside, the details of the U.S. PPI were far more mixed and sticky components – such as air fares – may yet irk the Federal Reserve’s favored PCE inflation gauge.

So that just spins everything back into the CPI release, with big U.S. banks kicking off the U.S. corporate earnings season before that hits later today.

The upshot for bonds is that 10-year Treasury yields have come off the boil, ticking back about 5 basis points from 14-month highs above 4.8% first thing on Wednesday. Fed futures are back comfortably pricing one more Fed rate cut this year, though hesitating at two.

And as night follows day, that’s pulled the dollar index back lower too.

The less equivocal UK inflation data saw 10-year gilts outperform after their torrid start to 2025, offering considerable relief to a government wary of being forced to tighten fiscal policy again before its underlying growth priority materialises.

The 30-year gilt yield, the most alarming this year has pulled back up to 10bps from the 27-year highs it set on Monday.

Despite the implications for Bank of England easing, the pound seems to have held the line.

Curiously, Britain’s banks have resisted upping mortgage rates into the gilt jolt. Many are accepting smaller profit margins and bigger risks on UK mortgage lending despite a tightening of sterling money markets – with their appetite to lend greater than worries about higher funding costs.

For U.S. stock markets starting to turn heads to the earnings season, the bond stabilisation has given some solace.

The S&P500 edged higher on Tuesday, with the small cap Russell 2000 outperforming. Futures are up marginally ahead of the bell.

European stocks were higher too, with inflation updates from France and Spain coming in on forecast – the former remaining below 2% for the fourth month running.

The European Central Bank is likely to keep easing policy this year but needs to be cautious as exceptional uncertainty – from a potential global trade war to domestic politics – clouds the outlook, two of the bank’s top officials said on Wednesday.

“From our point of view, saying here’s where we think the future rate path is going to be conveys a sense of certainty that we don’t feel,” ECB Chief Economist Philip Lane said in Hong Kong.

And it’s that level of uncertainty – not least about the potentially inflationary policies of U.S. President-elect Donald Trump’s incoming administration – that means bond market relief about backward-looking inflation data may be tempered.

Trump’s inauguration is on Jan. 20, but the confirmation hearing for his Treasury Secretary nominee Scott Bessent is due tomorrow.

Elsewhere, Chinese stocks underperformed as they gave back part of Tuesday’s sharp rally. Trepidation about looming U.S. tariff hikes and a fresh sweep of U.S. technology curbs is keeping sentiment subdued ahead of Friday’s big economic data dump of quarterly GDP and December industry numbers.

Perhaps one factor unnerving world bond markets this month, Japan’s yen firmed against the softer dollar as speculation builds about another interest rate rise from the Bank of Japan as soon as next week.

The Bank of Japan will debate whether to raise interest rates next week, Governor Kazuo Ueda said on Wednesday, signalling its intention to take borrowing costs higher barring a Trump-driven market shock.

“There was a lot of positive talk on the wage outlook” when the BOJ’s regional branch managers met last week, Ueda said.

“We will discuss whether to raise interest rates at next week’s policy meeting and would like to reach a decision.”

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

* US December consumer price report, NY Federal Reserve January manufacturing survey

* Federal Reserve issues Beige Book of economic conditions

* New York Federal Reserve President John Williams, Chicago Fed President Austan Goolsbee, Minneapolis Fed chief Neel Kashkari and Richmond Fed chief Thomas Barkin all speak; Bank of England policymaker Alan Taylor and BoE Executive Director for Financial Stability Strategy and Risk Nathanael Benjamin both speak

* US corporate earnings: BlackRock, JPMorgan, Citigroup, Well Fargo, Goldman Sachs, Bank of New York Mellon

(By Mike Dolan, editing by Sharon Singleton; mike.dolan@thomsonreuters.com)

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