A look at the day ahead in U.S. and global markets from Mike Dolan.
For markets navigating the barrage of major central bank interest rate rises this week – there’s a ways to go, much as Fed chief Jerome Powell insists about the tightening cycle.
Matching the Federal Reserve late Wednesday, the European Central Bank and Bank of England are expected to deliver half-point rate hikes later today – both similar downshifts in the scale of tightening and still shy of likely peaks.
The Swiss National Bank already announced a 50 basis points rate rise to 1% – its third hike of the year – and said further rises “cannot be ruled out.” Central banks in the Philippines, Norway and Taiwan also raised rates by 50bp, 25bp and 12.5bp respectively.
That’s some squeeze worldwide – not least if this year’s rise in borrowing costs hits slowing real economies with a lag next year. But the policy message all around is that more pain is coming unless there’s further evidence of sky-high inflation rates returning to 2% targets.
With inflation still in double digits in the euro zone and Britain, markets see ECB rates almost doubling from the current 1.5% by the second half of next year and UK rates some 1.5 percentage points higher by then too. Any protest at that market pricing later on Thursday will be closely eyed, as will what both central banks indicate about unwinding pandemic-related bond-buying programmes.
“I wish there were a completely painless way to restore price stability. There isn’t,” Powell said after Wednesday’s move to lift the Fed funds target rate to 4.25-4.5%.
Slightly puzzling for some analysts, the Fed revised economic forecasts from September to show higher interest rates and slower growth next year, but higher inflation – even though inflation has been falling since a 2022 peak above 9% in June.
The median of projections from Fed officials showed policy rates at 5.1% in a year’s time, up from the equivalent 4.6% forecast three month ago.
But markets still think the Fed is talking tough for effect and will blink eventually in the face of possible recession and disinflation. Peak Fed rates implied in futures markets on Thursday remain 20bp below that official Fed projection and year-end market pricing is some 70bp below it.
Wall St stocks and U.S. Treasury yields responded likewise to the relatively hawkish Fed noises. Two and 10-year yields as well as the S&P500 and Nasdaq have held broadly where they were before the Fed decision.
Awaiting the ECB and BoE decisions, however, stock futures were in the red again and Asia and European bourses lower too. The recently retreating dollar perked up.
Underlining investors’ take that potential global recession next year will not allow central banks to stamp much harder, China reported ever more damage from its messy battle with COVID and attempts to contain fresh outbreaks.
The economy there lost more steam in November as factory output slowed and retail sales extended declines, both missing forecasts and clocking their worst readings in six months.
In corporate news, Tesla boss Elon Musk disclosed another $3.6 billion in stock sales on Wednesday, taking his total near $40 billion this year and frustrating investors as the company’s shares wallow at two-year lows.
HSBC shares fell almost 2% on Thursday after a small group of its Hong Kong-based retail investors launched a renewed campaign to get the lender to restore its pre-pandemic dividend and set out a plan to spin off assets.
Key developments that may provide direction to U.S. markets later on Thursday:
* European Central Bank, Bank of England and Central Bank of Mexico policy decisions
* U.S. Nov retail sales, industrial production, weekly jobless claims, Oct business inventories, Philadelphia Fed’s Dec business survey, NY Fed’s Dec manufacturing survey, U.S. Treasury Oct TIC data on foreign holdings of Treasury securities
* U.S. corporate earnings: Adobe
* EU summit in Brussels Graphic: Fed inflation forecasts, https://www.reuters.com/graphics/FED-INFLATION/USFED-INFLATION/gdvzqyoeypw/graphic.jpg Graphic: Will the ECB slow down? https://www.reuters.com/graphics/EUROZONE-MARKETS/ECB/mopaknxbjpa/chart.png Graphic: China’s retail sales contraction deepens, https://www.reuters.com/graphics/CHINA-ECONOMY/dwvkddemdpm/chart.png
(By Mike Dolan, Editing by Hugh Lawson mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)
