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Opening Call:
Shares may track lower at the start in Europe on Thursday. In Asia, stock benchmarks were mixed; Treasury yields were little changed; the dollar weakened; oil and gold futures gained.
Equities:
European futures are lower early Thursday even as earnings reports continue to underpin investor sentiment, and hopes rise that cooling inflation can help major central banks end their interest-rate hikes.
With second-quarter earnings beating expectations, even though profits overall are likely to fall for a third quarter, investors are hoping for an end to aggressive interest-rate hikes by the Federal Reserve this year.
Inflation in the U.K. slowed to 7.9% in June, from 8.7% a month earlier. With headline U.S. inflation now down to 3%-in striking distance of the Fed's 2% target-many investors have raised their bets that the Fed's campaign of rate increases will end without a serious recession.
Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company, said he thinks the macro news is having a more dominating effect on the stock market than earnings news.
"Certainly earnings have come in and they've been supportive of that, but the prime worry over the past year has been when would inflation come down, and will the Fed's actions put the economy into a recession. And it appears that the answer so far has been no," Schutte said.
"I think you still have a lot of liquidity leftover from the monetary policy during Covid that has helped to keep the U.S. economy afloat. I categorize it as policymakers are in control of the bathtub--they turned on all the faucets in 2020 to fill the bathtub with water, with liquidity, to keep the economy moving. Now they've completely shut off the faucets and opened the drain, but not all the liquidity and all the water has gone," Schutte said.
Forex:
The dollar weakened in Asian trade in a likely spillover effect from the yuan's sharp gains versus the greenback.
USD/CNH has come off overnight highs this morning, owing to PBOC's very strong yuan fixing and adjustment of cross-border financing parameter to support yuan, Maybank analysts said.
Earlier, the PBOC relaxed rules to allow companies to borrow more from overseas by raising its macro-prudential parameters for companies' and financial institutions' cross-border funding to 1.5 from 1.25, effective immediately.
With little in the way of economic news ahead of next week's Fed meeting and a quarter-point hike by the FOMC likely, Oanda said August's annual Fed meeting in Jackson Hole takes on more significance.
"Jackson Hole will be a pivotal moment for the Fed in it could finally signal it's done raising rates," it said.
Overall, the disinflation scenario is becoming clearer in the U.S. and in Europe with U.K. data showing consumer prices slowing more-than-expected last month.
Nevertheless, Oanda cautioned that the U.S. jobs market was still strong and only weakening slowly, which remains a focus for the Fed.
Bonds:
Treasury yields were little changed after cooler-than-forecast U.K. inflation bolstered the narrative that central banks will soon be done raising interest rates.
Data from the U.K. on Wednesday showed consumer price inflation rose in June to 7.9%, its lowest level in more than a year and below economists' forecasts -- prompting a dip in government bond yields in Europe and the U.S.
"More evidence that inflation is falling back in most economies has pushed government bond yields down across developed markets (DMs) over the past couple of weeks," said Capital Economics.
"We think that disappointing growth, as well as central banks eventually cutting rates by more than investors currently expect, will put even more downward pressure on yields over the next two years or so," it said.
Markets have priced in a 99.8% probability that the Federal Reserve will raise its policy interest-rate target by 25 basis points to between 5.25%-5.5% next Wednesday, according to the CME FedWatch Tool.
The chances of another hike of that size, which would take the fed funds rate target to 5.5%- 5.75%, by November was seen at 28.3%. The central bank is expected to take its fed funds rate target back down to around 5% or even lower next year.
Energy:
Oil futures gained slightly early Thursday.
A failure by WTI and Brent crude oil to hold above $74.60/bbl and $78.66/bbl, respectively, could prompt commodity trading advisors to add back their short positions, Ryan McKay, senior commodity strategist at TD Securities said.
However, The Price Futures Group said that the market has to realize that oil demand "continues to be strong in the United States and China," and the market is starting to draw on stocks at Cushing, Okla. instead of the SPR.
So if demand holds up, "we're going to see significant drawdowns in both oil and product inventories," it said.
But a rebound in the U.S. dollar is "tempering enthusiasm" as the market tries to judge what the Fed's next move is going to be after softer housing and inflation data seem to suggest the rate-hike cycle may soon peak.
ING reckoned it was only a matter of time until Brent moved solidly above $80 a barrel with oil supplies expected to tighten in the second half of the year.
"How convincing this move will be will really depend on whether we see a big shift in speculative sentiment. Whilst we have seen an increase in speculative buying in recent weeks, historically it is still fairly modest, particularly when you consider the tightening that is expected in the physical market," it said.
Metals:
Gold moved higher on expectations for a last Fed rate increase this month spurred by the recent benign U.S. inflation data.
The precious metal is running into some resistance around $1,980/oz, Oanda said.
But, it is also approaching $2,000/oz, which is a major barrier to the upside, it said, adding that a break of this level could signal that traders have become bullish on the precious metal.
"How long gold can continue to trade at such high levels remains to be seen with the reaction to next week's Fed rate decision a key staging post for gold's long-term durability," said Rupert Rowling, a market analyst at Kinesis Money.
"Considering that another increase is priced in already, gold may yet prove able to shrug off the latest hike but if there is an indication in the press conference and supporting commentary that further hikes are still likely, then gold could fall sharply."
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Copper gained amid weakness in USD, which typically has an inverse correlation with the base metal.
Copper is the energy-transition trade within the commodities complex, Citi Research analysts said.
Citi recommends copper investors and consumers with longer-term horizons to scale into the base metal over the next 6-12 months at or below levels of roughly $8,000 a ton.
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Iron-ore futures rose on investor sentiment boosted by hopes for potential China stimulus in the wake of soft economic data.
But analysts said the rally was unlikely to last long.
"Iron ore's fundamentals are weak, with both supply and demand fading," Nanhua Futures analysts said.
These conditions were unlikely to support further price increases, they added.
TODAY'S TOP HEADLINES
China Keeps Benchmark Lending Rates Unchanged
China's benchmark lending rates were kept unchanged, as expected on Thursday, following a hold of policy rates earlier this month. However, economists say Beijing will need to ramp up support to shore up the country's sputtering economy.
The one-year loan prime rate was held steady at 3.55%, while the five-year LPR was unchanged at 4.2%, the People's Bank of China said. The loan prime rates are calculated monthly based on the interest rates which 18 designated commercial banks charge their best clients.
Investors are the most bullish on stocks since before the 2022 bear market, says Vanguard
Investors in June said they expected U.S. stocks to return 5.5% in the next 12 months, their most bullish forecast since the 2022 bear market, according to a Vanguard survey.
That is up from a 3.7% expected yearly increase for stocks as of April, and the highest reading since the 6% forecast in December 2021 (see chart). That was roughly a month before the S&P 500 index SPX hit a record high in January 2022, after which time the index fell at least 20% from its peak, meeting the widely held criteria for a new bear market.
Why one analyst thinks possible recession could still arrive by February
It's been a full year since one of the U.S. bond market's most reliable gauges of impending recessions started to consistently flash worrisome signals, and yet no downturn has materialized.Instead, investors and traders are now increasingly hopeful about a soft landing, or scenario in which inflation continues to ease without a meaningful uptick in unemployment or a recession - raising doubts about the credibility of the Treasury market's pessimistic message over the past 12 months. Read: Goldman chief economist sees reduced chance of recession and dismisses inverted-yield-curve worriesAmid the continuing debate about whether the world's largest economy will or won't fall into a contraction lasting two consecutive quarters, strategist Jim Reid of Deutsche Bank weighed in via a Wednesday note with the view that the window in which a U.S. downturn could still happen actually runs through next February. That's based on how historical lags between U.S. recessions and an inverted spread on 2- BX:TMUBMUSD02Y and 10-year Treasury yields BX:TMUBMUSD10Y have played out over the past seven
(MORE TO FOLLOW) Dow Jones Newswires
07-20-23 0015ET
