MORNING BID-U.S. CPI, ECB day, say no more

Credit: REUTERS/Kai Pfaffenbach

The recent calm on financial markets will be put to the test on Thursday, with the release of U.S. inflation numbers and a meeting of the European Central Bank.

A look at the day ahead from Dhara Ranasinghe.

The recent calm on financial markets will be put to the test on Thursday, with the release of U.S. inflation numbers and a meeting of the European Central Bank.

The CPI data for May is probably one of the most significant inflation readings in recent years, possibly showing whether the pick-up in prices is temporary or the start of something more sustained.

It could well have implications for when the Federal Reserve decides to start unwinding -- or tapering - its bond-buying stimulus.

Economists polled by Reuters forecast U.S. headline inflation rose 4.7% in May year-on-year, from 4.2% in April.

A stronger number could end the upbeat tone in U.S. Treasury markets, where ebbing inflation fears have pushed yields below 1.5%, the lowest in a month. Breakeven rates, essentially where markets see future inflation, have also fallen back sharply.

European borrowing costs have fallen too in their wake but they face their own test now in the shape of the ECB meeting.

The bank is all but certain to maintain a generous flow of stimulus to prevent higher borrowing costs from smothering the nascent economic recovery. Still, any signs the ECB is mulling dialling back the pace of emergency bond buys could renew upward pressure on yields.

Finally, it's the eve of the G7 heads-of-state meeting and U.S. President Joe Biden is due to meet British Prime Minister Boris Johnson later on Thursday; some expect Biden to wade in with a warning on the Brexit front amid a brewing EU-UK row over Northern Ireland .

So ahead of those events, world stocks are treading water and the dollar is near five-month lows. Traders may be marking time by watching more "meme" stocks shenanigans unfold after a fresh set of small companies saw share surges on Wednesday.

Key developments that should provide more direction to markets on Thursday:

- ECB decision at 1145 GMT, news conference at 1230 GMT.

- Japanese wholesale prices rose at fastest annual pace in 13 years

- China PBOC governor Yi Gang expects annual average inflation below 2% this year.

- Volkswagen VOWG_p.DE sees semiconductor supply shortages easing in Q3

- UK house-buying frenzy builds ahead of tax cut deadline - RICS

- Emerging markets: central banks meet in Peru and Serbia.

- Yuan briefly hits 1-week high on Sino-U.S. trade talks.


(Reporting by Dhara Ranasinghe; editing by Sujata Rao)

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