A look at the day ahead in U.S. and global markets from Mike Dolan
There’s no doubt there’s a doubt about any U.S. interest rate cuts this year.
After weeks of market trepidation about stalling U.S. disinflation amid still-brisk economic growth, Federal Reserve top brass are making clear that this year’s rate cut plans are on ice until further notice.
Even though Fed policymakers seemed to re-affirm their expectation of as many as three quarter-point cuts in 2024 as recently as last month, the picture has shifted considerably since.
Echoing a series of similar soundings from his colleagues in recent days, Fed Chair Jerome Powell late on Tuesday said stubborn inflation and a still-strong U.S. economy meant restrictive policy needed more time to work.
“The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell told a forum in Washington, in what is likely to be his last public appearance before the April 30-May 1 policy meeting.
Fed futures are taking the message on board, with as little as 40 basis points of easing now priced for the whole year – less than two quarter-point cuts. Uncertainty about any rate cut before November’s election has re-emerged and just 23bps of cuts are now in the price by the Sept 18 meeting.
But the relatively modest reaction of stocks and bonds so far to Powell’s blunt message shows the extent to which rate cut doubts had already been sown in markets.
Two-year Treasury yields briefly topped 5% again, but have slipped back to 4.95% early on Wednesday.
The latest global fund manager survey from Bank of America showed a massive 20-percentage-point drop in overall allocations to bonds – the biggest monthly fall since 2003 — leaving asset managers registering a net underweight position of 14%.
The extent of U.S. economic outperformance, underlined by March retail and industry soundings this week that put the Atlanta Fed’s ‘GDPNow’ estimate for first-quarter growth just shy of 3%, was highlighted by the International Monetary Fund’s latest global forecasts.
The Fund now expects the U.S. economy to expand 2.7% this year – some 1.2 percentage points higher than it forecast six months ago.
The Fed’s so-called ‘Beige Book’ of the latest economic conditions is due for release later on Wednesday. And news on Tuesday of a sharp drop in housing starts last month cut through the heat registered elsewhere.
With first-quarter corporate earnings streaming in, U.S. stocks largely took the Powell punch on the chin so far too.
The S&P500 closed in the red for the third straight session and hit its lowest in almost two months – but the decline on the day was a modest 0.2% and futures are slightly firmer ahead of today’s bell.
The Dow Jones Industrial Average actually rose on the day as UnitedHealth’s upbeat quarterly results lifted its stock more than 5%.
But, even with eyes back on regional bank earnings again on Wednesday following last year’s disturbance, implied stock volatility captured by the VIX slipped back a tad to 18.
Although Middle East tensions loom large in the background, U.S. crude oil prices remained steady at $85 per barrel.
The dollar has been a big beneficiary of the Fed rethink in recent weeks – but it too fell back a touch from five-month highs overnight.
One driver of the dollar was the idea that other central banks would go ahead and ease policy anyway, regardless of Fed hesitation.
European Central Bank boss Christine Lagarde, for example, seemed to double down on Tuesday on plans for June ECB cut.
But above-forecast British inflation for March – even though core inflation rates there did fall to their lowest in more than two years – may provide some notes of caution from the Bank of England.
Overseas stocks were mixed on Wednesday, with China’s bourses outperforming in Asia as the nation’s top securities regulator clarified the new delisting rules to calm the market. The China Securities Regulatory Commission said late on Tuesday that tighter rules would not spark a wave of delistings.
The yuan also firmed up from Tuesday’s 2024 low.
In Europe, ASML dropped 4.8%, steering a 1.8% decline in the technology sector, after the Dutch firm reported weaker-than-expected new bookings in its first-quarter earnings. But LVMH rose 2% after the world’s largest luxury group’s quarterly sales rose 3%.
Key diary items that may provide direction to U.S. markets later on Wednesday:
* US corporate earnings: US Bancorp, Citizens Financial, Travelers, Discover Financial, CSX, Equifax, Prologis, Abbott Laboratories, Kinder Morgan, Crown Castle, Las Vegas Sands
* Federal Reserve issues Beige Book on economic conditions, US Treasury releases TIC data on overseas Treasury holdings
* International Monetary Fund/World Bank Spring meetings start, IMF releases Global Fiscal Monitor
* Fed Board Governor Michelle Bowman and Cleveland Fed President Loretta Mester speak; European Central Bank board members Isabel Schnabel and Piero Cipollone speak; Bank of England governor Andrew Bailey and BoE policymakers Jonathan Haskel and Megan Greene speak
* US Treasury sells 20-year bonds
(By Mike Dolan, editing by Christina Fincher, [email protected])
Source Agencies
