A look at the day ahead in U.S. and global markets from Mike Dolan
With next week’s Federal Reserve meeting up close and personal – once a hot favourite date for a first rate cut – this is not the outcome the bond market bargained for at the turn of the year.
A second U.S. inflation disappointment in the space of a week, the biggest annual oil price gains since 2022 and a very real chance the Bank of Japan ends its long-standing negative interest rate policy as soon as Tuesday all took a toll on Treasuries over the past 24 hours.
With futures now doubting a rate cut will come at all in the first half of the year – and more than 50 basis points lopped off expectations for the whole easing cycle since January – Treasury yields surged again on Thursday. Markets are now expected less than half the 2024 rate cuts they saw eight weeks ago.
Both 2-year and 10-year Treasury yields jumped more than 10bp each after stickiness seen in February’s consumer prices earlier in the week was matched by equally stubborn producer prices for the month – while supply concerns accelerated year-on-year oil prices close to 20% and crude hit its highest for the year.
In price terms, two-year Treasuries are now negative for the year, while 10-year notes are down 7%.
With the whole Fed horizon being revised higher, the dollar has rebounded to best levels in over a week.
Friday saw some calming as yields and oil prices fell back a touch.
To be sure, there were plenty of caveats around the latest sweep of data. Although both above forecast, annual headline and core PPI numbers are still 2% or less, last month’s retail sales rebound was less than expected and industry output readings are expected to be flat for the month when released later today.
But it makes for an uncomfortable backdrop going into next week’s central bank meetings nonetheless.
And the rumble in rates was enough to sideswipe stocks again too – with small cap indexes taking the brunt with losses of almost 2% on Thursday.
Against all that, relatively modest 0.3% losses in the S&P500 and Nasdaq were impressive and futures were steady early Friday. That said, the equal-weighted S&P500 did lose almost 1% and AI-leader Nvidia dropped 3%.
And the ongoing swoon in Tesla continued to alarm as the electric vehicle giant’s losses for the year to date hit 35% – knocking some $250 billion from its market value as it dropped another 4% on Thursday.
Dogged by sluggish EV demand in the first quarter, a price war and intense competition from China peers – not to mention a German arson shutdown in one of its factories and noise around chief executive Elon Musk’s $56 billion pay package – the stock losses are mounting.
Tesla has replaced Boeing as the worst performing stock on the S&P 500 index so far this year. Ten out of 48 brokerages rate the stock “sell” or “strong sell”, according to LSEG data.
Elsewhere, Bitcoin eased to a one-week low in volatile trade, as investors took profit from its run to a record high after the upside U.S. inflation surprise. It fell more than 5% in the Asian session to at low at $66,629.
In Japan, speculation about a BOJ policy tightening next week intensified and dragged the Nikkei lower again.
Japan’s biggest companies agreed to hike wages by 5.28% for 2024, the highest in 33 years, the country’s largest union group Rengo said on Friday, reinforcing views that the central bank will soon shift away from a decade-long stimulus programme.
The yen weakened, however – perhaps as much to do with the dollar’s jump on the Fed rethink.
European stocks fell back from Thursday’s records but were steadier early on Friday.
Chinese stocks were more mixed, with Hong Kong’s index falling as property worries continue to jar.
China’s new home prices dropped for an eighth straight month in February, suggesting the fragile property market is struggling to find a bottom despite a slew of measures to shore up the sector. New home prices fell 1.4% over the year – faster than the 0.7% drop in January and the biggest decline in 13 months.
Key diary items that may provide direction to U.S. markets later on Friday:
* U.S. Feb industrial production, Feb import/export prices, New York Fed March manufacturing survey, University of Michigan March consumer survey; Canada Feb housing starts
* European Central Bank chief economist Philip Lane speaks
* U.S. Energy Secretary Jennifer Granholm hosts EU-US Energy Council meeting in Washington
* French President Emmanuel Macron and Polish Prime Minister Donald Tusk meet German Chancellor Olaf Scholz in Berlin
* U.S. corp earnings: Jabil, Groupon, GigaCloud
(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com)
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