A Day Ahead View in US and Global Markets by Mike Dolan
Anxious bond traders appear to have taken comfort in the Federal Reserve’s surprisingly sharp brake on its “quantitative adjustment” process on Wednesday, while the yen capitalized on an easier dollar after what appeared to be the second bout of Japanese intervention this year. week.
It may be thin gruel after a predictably aggressive Fed meeting that showed little inclination to cut interest rates anytime soon, but the Fed’s widely predicted slowdown in its balance sheet was larger than many expected and may chime with their sensitivity to the securities market. distress and bank liquidity.
The US central bank said it would slow the pace of QT starting June 1, allowing just $25 billion in Treasury bonds to be liquidated each month, down from the current $60 billion.
Helped further by Fed Chairman Jerome Powell, who dispelled any idea that further rate hikes were again on the table, Treasury yields fell from year-to-date highs.
Futures markets have raised expectations for a full-year Fed cut to 35 basis points, although a first cut will not be fully priced in until after the November election.
Two-year Treasury yields retreated from 5% – hovering just below 4.94% on Thursday – and 10-year yields fell to 4.60%.
Facing a strong earnings season and some outsized drops in the prices of artificial intelligence stocks such as Super Micro Computers and AMD, Wall Street’s stock indexes have been divided over the Fed’s reaction – ending in the red on Wednesday, but with futures rising quickly again. of the bell.
Apple weathers another blizzard of corporate updates on Thursday.
The dollar directly followed suit with Treasury yields and the DXY index came off six-month highs.
And just as it started to fall, the Bank of Japan appears to have struck for the second time this week – triggering a peak-to-trough drop of almost 5 yen, or 3%, on Wednesday.
As happened on Monday with the sale of $35 billion in dollars for yen, there was no immediate confirmation of the action – but traders noted the authorities’ change in tactics in selling the dollar, as it was already slow down, rather than stagnate its rise at a maximum of 34 years. just above 160 yen earlier this week.
Data from the Bank of Japan suggested on Thursday indicated that they spent between $21 billion and $24 billion on Wednesday to pull the yen to its lowest level – bringing the week’s total to close to $60 billion , the amount spent during a three-day salvo in late 2022.
But despite the action, the yen continues to rise due to the huge interest rate disparity between the US and Japan and dollar/yen returned above 155 on Thursday – suggesting that Tokyo may be in for a battle prolonged period that could quickly deplete its estimated $155 billion in dollars. deposits.
Atsushi Takeuchi, who headed the Bank of Japan’s foreign exchange division during rounds of intervention in 2010-2012, said Japan will likely continue intervening to support the yen until the risk of speculators triggering a free fall in the currency is eliminated.
JOB MARKET
Back on Wall St, attention will quickly shift from the Fed meeting to the labor market and April payrolls report on Friday.
And in that sense, there were some signs on Wednesday that the job market is cooling a bit.
While private sector payrolls appeared to remain strong last month, other data showed that US job openings fell to a three-year low in March and the number of people leaving their jobs declined – signs of improving labor market conditions that, over time, could help the Fed’s economy fight inflation.
A continued decline in oil prices below $80 per barrel will also help ease the bond market’s nerves.
But global analysts remain in little doubt about the fundamental strength of the US economy.
Showing some significant divergence with other major economies, the OECD’s latest world forecast said that persistent sluggishness in Europe and Japan was being offset by the United States, whose growth forecast was raised to 2.6% this year, compared to an estimate previous 2.1%.
In unique stock moves in Europe, Danish drugmaker Novo Nordisk lost 2.5% despite a beat in the first quarter and a rise in outlook, with analysts pointing to slower underlying growth and weakness in sales of obesity drugs .
But Standard Chartered jumped 7% to a six-month high, as the emerging markets-focused lender reported a 5.5% rise in first-quarter pretax profit that beat estimates.
Top daily items that could guide US markets later this Thursday:
* US Q1 productivity and unit labor costs, weekly unemployment insurance claims, March international trade balance, March industrial goods orders
* US Corporate Profits: Apple, Amgen, Conocophillips, Expedia, Moderna, Consolidated Edison, Moody’s, Ingersoll Rand, Motorola Solutions, Southern, Intercontinental Exchange, Linde, Regeneron Pharmaceuticals, Cigna, Zimmer Biomet, Dominion Energy, Alliant Energy, Coterra Energy , Stanley Black & Decker, Pinnacle West, Cummins, Regency Centers, Live Nation, AES, Hologic, Illumina, AMETEK etc.
* Bank of Canada Governor Tiff Macklem and European Central Bank Chief Economist Philip Lane speak
* Meeting of the OECD Ministerial Council in Paris, release of the Economic Outlook
* French President Emmanuel Macron meets Japanese Prime Minister Fumio Kishida in Paris
* US Treasury sells 4-week bonds
(Reporting by Mike Dolan; Editing by Alison Williams mike.dolan@thomsonreuters.com)
