A look at the day ahead in the US and global markets by Mike Dolan
And then there was one more.
In an extraordinary turnaround in just five months, financial markets have now fully priced in just one quarter-point interest rate cut by the Federal Reserve this year – down from the six built into futures prices in early 2024.
The good news is that this is largely due to the strength of the continued expansion in the US. The bad news is that that very strength makes it harder for the Fed to see inflation hit its target and keeps the Fed hesitant about an initial rate cut.
Thursday’s turnaround on Wall Street clearly reflected all that, with surprisingly strong corporate and labor market updates making up the worst day of the month, despite Nvidia’s (NASDAQ:) nearly 10% surge on another explosive earnings report steeped in artificial intelligence. tree.
Although the broader technology sector ended the day higher, the ten other major stock sectors remained in the red. And the equal-weighted S&P500 lost 1.4%.
Fed fears 1 – AI 0.
With the Fed pricing in an easing of just 35 basis points for this year, two-year Treasury yields rose back to within 4 basis points of the 5% threshold. The dollar jumped back to its best level since mid-May, which in turn caused a reversal in high gold prices – the worst day of the month and the worst week of the year.
The stock has bounced back more than a point from pre-pandemic lows.
A so-called “bear-flattening” of the yield curve caused the inversion of the 2-10-year yield gap to deepen to its most negative this year – with yields on both maturities rising, but short-term rates rising even more.
The yield curve has been solidly inverted for almost two years now, and its reliability as a harbinger of a recession has been in tatters. This underlines the peculiarity of this particular cycle and how the Fed may struggle to cool it.
Ahead of the US holiday Memorial Day on Monday, all major price indicators have returned some of Thursday’s moves – with both government bond yields and the dollar up 0.2% before the bell and a touch lower.
But the Fed’s rate moves swept the world overnight, with stock markets in Tokyo, Seoul, Hong Kong and Shanghai losing more than 1% on Friday.
China’s ongoing military exercises around Taiwan have not boosted investor confidence.
Europe’s two-day loss continued, with regional interest rates and political concerns of their own.
While the European Central Bank is still keen to deliver its first interest rate cut next month, the unexpected strength of corporate data in May and a surprising acceleration in negotiated wage agreements in the first quarter have pushed market prices ahead of the ECB’s easing below 60 basis points again throughout the year. .
The rethink of the Bank of England’s trajectory this week was even more dramatic, as sticky British inflation figures combined with news of an early election on July 4.
Although Friday’s figures showed Britain’s retail sales fell much more than forecast last month, money markets have wiped out the chance of a BoE cut next month and now see only a 1 in 3 chance of a move in August.
Sterling, whose broader trade-weighted index is back to an eight-year high at pre-Brexit referendum levels, has recovered some of Thursday’s losses against the dollar.
Elsewhere, traders followed the G7 financial meeting in Italy and a Friday speech by Fed Governor Chris Waller in Iceland.
In company news, a 7.55% drop in Boeing (NYSE:) on Thursday, after the US planemaker forecast negative free cash flow through 2024, sent the blue chip down more than 90 points.
Ticketmaster owner Live Nation lost nearly 8% after the U.S. Department of Justice, along with a group of 30 states and the District of Columbia, filed a lawsuit Thursday to break up the concert promoter.
In Europe, shares of Renault (EPA:) rose 4% after the French automaker announced a share buyback plan. And that of Great Britain National network (LON:) has regained almost all of Thursday’s 10% decline on plans to raise about 7 billion pounds ($8.9 billion) through a rights issue.
Abrdn shares fell after the British fund manager’s CEO Stephen Bird resigned.
Key agenda items that could provide direction to the US markets later on Friday:
* Durable goods orders in April in the US, according to the latest University of Michigan household survey in May
* G7 finance ministers and central bank governors meet in Stresa, Italy
* Federal Reserve Governor Christopher Waller speaks
* US Corporate Earnings: Workday (NASDAQ:)
(By Mike Dolan, Editing by Nick Macfie mike.dolan@thomsonreuters.com)
