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

U.S. stocks surf new records as the last full week of the quarter comes to a close, with China’s furious monetary easing accelerating the rebound there and Wall Street eyeing the release of the Fed’s favored inflation gauge.

After a barrage of interest rate cuts, real estate props and stock market supports this week, China’s central bank cut its one-week reverse repo rate by another 20 basis points on Friday – trying to get across what it likely sees as an alarming economic slowdown that may see it miss 2024 targets.

Reuters reported Chinese cities Shanghai and Shenzhen are planning to lift remaining restrictions on home purchases to attract potential buyers and shore up flagging real estate markets.

Whether the widening stimulus proves effective or not, the forcefulness and intent is becoming clear. As is the backdrop.

China’s industrial profits swung back to a sharp contraction in August, plunging almost 18% from a year earlier, according to new data.

But heading into a series of holidays next week, China’s mainland stocks indexes <.CSI300 surged anew – adding another 4.5% again on Friday to notch their best week since 2008.

With new public borrowing central to the plan and hopes of some recovery afoot, 10-year Chinese government bond yields pushed higher. But the offshore yuan backed off 16-month highs amid reported selling by state banks.

Back on Wall Street, the persistent strength of the U.S. economy was underlined on Thursday by another surprising drop in weekly jobless claims, robust durable goods orders last month and second-quarter post-tax corporate profit growth that was revised higher to 3.5%.

Attention now turns back to inflation to see if the Federal Reserve’s projected easing path is warranted in that light, and August PCE gauge is released later on Friday.

While consensus forecasts are for a 0.2% rise in ‘core’ PCE last month that would see the annual rate tick up to 2.7% from 2.6%, Fed governor Christopher Waller suggested last week softening components in that report were a key reason for the Fed’s outsize 50-bp rate cut.

Federal Reserve Governor Lisa Cook on Thursday endorsed the size of that cut as a way to address increased “downside risks” to employment. “I whole heartedly supported the decision.”

Treasury Secretary Janet Yellen said the economy was on course for a ‘soft landing’ and that would allow Fed rates to come down to ‘neutral’ levels – seen by Fed officials and financial markets as around 3% compared to the current 4.75-5.0% range.

Given the strength of the latest numbers however, futures now see only a 50% chance of another 50-bp cut at the Fed’s next meeting in November. Another 25-bp move is baked in and some 75 bps by year end.

Ten-year Treasury yields steadied on Friday after creeping higher over the past week, with the 2-10-year yield curve gap slipping back to a positive 15 bps. U.S. 30-year fixed mortgage rates edged down to a two-year low of 6.08% this week.

The dollar index was firmer, with the euro retreating as euro zone inflation numbers heaped pressure on the European Central Bank to keep cutting its interest rates next month and money markets there now fully price another 50 bps off ECB rates by yearend.

France’s headline inflation rate plunged by more than expected to just 1.5% in September, well below the ECB’s 2% target and weighed down by sharp declines in energy prices.

With annual crude price declines running at almost 30% after a fresh plunge this week, the disinflation pulse will be building everywhere.

ECB sources say dovish members of the council are pushing hard for a third rate cut of the year at October’s policy meeting, according to a Reuters report on Thursday.

The number of people out of work in Germany rose more than expected in September in the latest sign of the challenges facing Europe’s largest economy.

Elsewhere, the Bank of Mexico lowered its benchmark interest rate by 25 bps to 10.50% on Thursday, the second straight cut as price pressures have eased in Latin America’s No. 2 economy.

And Japan’s yen jumped on Friday, recovering earlier losses, after Japan’s former defense minister Shigeru Ishiba won the leadership contest of the country’s ruling Liberal Democratic Party and was set to become its next prime minister.

Ishiba is a critic of past monetary stimulus and told Reuters the central bank was “on the right policy track” with rate hikes thus far.

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

* U.S. August PCE inflation gauge, personal income and consumption, August trade balance, August retail and wholesale inventories, final September sentiment survey from University of Michigan

* Federal Reserve Board Governor Michelle Bowman speaks

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

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