Inflation cools, TSMC offers AI weather vane Oct 17

The main three U.S. indices all closed in the green on Wednesday with banks and small caps leading the rise. Big Tech, however, remains under pressure, which may intensify the spotlight even more on TSMC’s third quarter results on Thursday.

Taiwan Semiconductor Manufacturing Co, the main producer of advanced chips used in artificial intelligence applications, is expected to report a 40% leap in profit to T$298.2 billion ($9.27 billion) thanks to soaring demand.

The world’s largest contract chipmaker, whose customers include Apple, Nvidia and ASML, has benefited from the global surge towards AI. A miss or weak guidance, however, could trigger another wave of selling across Big Tech.

But assuming analysts’ estimates are met or even exceeded, the backdrop to Thursday’s session in Asia looks favorable, despite the dollar’s tick higher. The VIX index of U.S. stock market volatility dipped back below 20.0 on Wednesday and oil fell for a fourth day in a row.

Falling oil prices are often a warning of weak global economic activity and demand. A huge miss and surprising slump in Japanese machinery orders on Wednesday will only have strengthened those concerns.

But the disinflationary pull from oil’s weakness cannot be ignored, and if investors like one thing it’s lower interest rates. In that light, investors will have been encouraged by the price signals from around the world over the last 24 hours.

Inflation in New Zealand was slightly weaker than expected, inflation in Britain was much weaker than expected and sure to cement UK rate cut expectations, while the Bank of Thailand delivered a surprise rate cut.

With the European Central Bank widely expected to cut rates on Thursday by 25 basis points for a second meeting, to 3.25%, global financial conditions are loosening. Rates traders currently expect the Fed, ECB and Bank of England each to cut rates another 50 bps and the Bank of Canada to cut at least another 75 bps by the end of the year.

That’s a lot of easing, especially without a recession, at least in the US. Indeed, if there is a US recession coming, someone forgot to tell the corporate bond market, where spreads are now the tightest in nearly 20 years.

This is usually where the first hints of recession are seen as investors move to price the impending impact of rising unemployment, slowing growth and consumer weakness on companies’ debt loads.