Stocks and dollar dive ahead of important days
- European stocks fall in early trade
- US 2-year yields near 15-year high, dollar near 3-month high
- China stocks falter, yuan weakens on soft inflation data
- Nikkei up 0.6%, yen rises as Ueda approved as next BOJ governor
- Powell confirms hawkish guidance, March hike size not made deal
LONDON, March 9 (Reuters) – Global markets were in a rare pause on Thursday ahead of week-end U.S. jobs data that could easily whip up more storms across assets.
Europe’s equity markets started fractionally lower, although there was little movement from either USD/FRX or in bond markets, where recession warnings have become increasingly sharp again. /US
US Federal Reserve Chairman Jerome Powell stuck to his message of higher and potentially faster rate hikes at a hearing on Wednesday, but also stressed that the decision will depend on the strength of incoming data.
That means traders will look even more intently at US payrolls data on Friday and then US inflation numbers that follow on Tuesday.
Financial markets are now pricing in a close to 80% probability of a 50 basis point rate hike at the Fed’s March meeting, up from around 30% at the start of the week. There is also a growing expectation that the US central bank can push the interest rate to 6%.
“Our core view is that 5.5% will be enough, but that they (the Fed) will have to stay there longer than the market expects.” said Iain Cunningham, Co-Head of Multi-Asset Growth and Co-Portfolio Manager for Ninety One Global Macro Allocation Fund.
“A US recession is our key scenario,” he said, adding that the fund was still very long the dollar, particularly against currencies such as the Canadian dollar and the British pound.
The U.S. dollar index, which measures the dollar’s value against a basket of major peers, hovered near a three-month high of 105.57. However, it lost 0.4% to the Japanese yen at 136.78 per dollar.
Japan’s lower house of parliament on Thursday approved the government’s nominee Kazuo Ueda as the next central bank governor, signing a new leadership that will be tasked with steering an exit from ultra-loose monetary policy.
However, the Bank of Japan is expected to maintain what it calls Yield Curve Control and uber-low interest rates at its latest meeting with its current boss on Friday.
Ten-year government yields again reached the BOJ’s policy ceiling of 0.5% on Thursday.
The dollar was also up against the Canadian currency at $1.3803 Canadian dollars, the highest level in nearly four months, thanks to a dovish Bank of Canada, which left interest rates on hold on Wednesday.
China’s yuan, meanwhile, weakened toward the key psychological level of 7 per dollar after the slowest annual consumer price growth data in a year, raising doubts about the strength of the economic recovery.
BACK TO THE 80s
Benchmark government bond markets remain the most important lightning rod for both interest rate expectations and the degree of pain the sharp increases are likely to inflict on the global economy.
Two-year government yields remained close to a 15-year high of 5.04%, while the benchmark 10-year yield was steady at 3.9953%.
Most notable is the gap between the yield on short-term two- and long-term 10-year government bonds, negative 108.2 basis points. It was the most extreme inversion since 1981. Inversions are seen as reliable recession indicators.
Also in Europe, the German 2s10s curve was at its most inverted point since 1992, with the 2-year German yield at 3.35% after 2007 and the 10-year yield at 2.68%.
“Powell admitted the decision in March is data dependent,” said Thierry Wizman, Macquarie’s global currency and rate strategist. “The question we face is therefore whether January’s economic re-acceleration was a failure or a trend.”
The pre-payroll caution meant both S&P 500 futures and Nasdaq futures were down 0.3%. Indices had also struggled on Wednesday after private payrolls beat consensus estimates and mortgage demand rose despite higher mortgage rates.
Forecasts for Friday’s key figure are a modest wage increase of 205,000 after January’s 517,000 jump led markets to reiterate expectations of monetary tightening.
Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) fell 0.6%, after falling 1.4% the previous session. Japan’s Nikkei (.N225), on the other hand, rose 0.6%.
Commodity prices were broadly lower, with Brent oil falling back to $82.45 a barrel, US crude down to $76.39 a barrel and global growth-sensitive copper metal down 1%. Gold was slightly higher at $1,817 an ounce.
Additional reporting by Stella Qiu in Sydney and Joice Alves in London; Editing by Angus MacSwan
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