A look at the day ahead in the US and global markets from Mike Dolan
The market’s slightly overreaction to Federal Reserve Chair Jerome Powell’s opposition against early US interest rate cuts was enough to spoil the weekend and prevent the S&P 500 (SPX) from posting its eighth straight daily gain.
Powell’s stance on Thursday was clearly more hawkish than investors had hoped – as he refused to rule out another rate hike and said the central bank was not yet confident its policy stance was restrained enough to bring inflation back to the 2% target.
Powell warned that the market was still betting that rate hikes had already taken place and that three cuts would come next year, starting in June: “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
Oddly enough, there was little change in underlying market rates after Powell spoke – with year-end 2024 futures still suggesting a rate of 4.50-4.75% versus the current 5.25-5.50%.
But the Treasury market suffered an even bigger shakeup, also undermined by weak demand at the recent long-bond auction. Two-year Treasury yields jumped more than 10 basis points on the day to more than 5%, with 10- and 30-year Treasury yields jumping 12 basis points to 4.65% and 4.77%, respectively.
The 30-year auction stopped at a high yield of 4.769%, higher than market expectations at the bidding deadline, indicating that investors demanded a premium to buy the bonds. The loss rate of more than 5 basis points was the largest since August 2011 and the bid-to-cover ratio declined.
More worryingly, indirect bidders – including foreign central banks – received just 60.1%, their lowest share in two years.
The reason for the bad auction, which occurred before Powell spoke, was less clear.
The possibility of bond trading cut short on Friday due to the early observance of Veterans Day may have had something to do with it. But others pointed to a ransomware attack on the US arm of the Industrial and Commercial Bank of China, which disrupted trading in the Treasury market on Thursday.
There were also some background concerns about the liquidity of the wider system. The Fed’s efforts to drain liquidity from the financial system have pushed the amount of money deposited daily in “reverse repo” facilities below $1 trillion for the first time since late summer 2021.
Whatever the main reason, the new tensions in the bond market were enough to knock the S&P 500 off its winning streak and it closed down about 1%. That rippled across global markets overnight – although Wall Street futures were firmer on Friday.
Attention now turns squarely to the release of the US October consumer price inflation report next week to see if it can influence Powell & Co.
The dollar (.DX) held on to its yield-backed gains on Friday, with USD/JPY rising toward last year’s high just below 152.
Although the latest British GDP numbers were slightly better than expected, they showed zero economic growth in the third quarter – a stark contrast to what was happening in the United States. The pound sterling fell.
Chinese stocks also fell in light of the decline in global markets and the decline of the yuan against the strong dollar as well. Embatted Country Garden (2007.HK) aims to develop an initial plan to restructure external debt by the end of this year, according to Reuters sources.
Meanwhile, US Treasury Secretary Janet Yellen began two days of meetings with Chinese Vice Premier He Lifeng on Thursday in an attempt to limit the economic fallout from tensions between Washington and Beijing and keep lines of communication open.
Key developments that should provide further guidance to US markets later on Friday:
* Some US government offices celebrate the Veterans Day holiday early, but stock markets are open
* November US consumer survey conducted by the University of Michigan
* Dallas Fed President Lori Logan and Atlanta Fed President Rafael Bostic speak. European Central Bank President Christine Lagarde and Bundesbank President Joachim Nagel speak
* Budget meeting of the Council of Economic and Financial Affairs of the European Union
Written by Mike Dolan, Editing by Eileen Hardcastle mike.dolan@thomsonreuters.com. Twitter: @Reuters Mike D
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