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A look ahead for the day ahead in the US and global markets by Mike Dolan.
When the tight US job market finally eases, markets suspect the Federal Reserve’s job may be done after all – but at the cost of a looming recession.
With private sector job listings for March released on Wednesday and Friday’s forthcoming national payroll report, US rates markets were rocked again on Tuesday by surprisingly weak job vacancy data, which pointed to a slowdown in labor demand.
US job listings fell to their lowest level in nearly two years in February, with 1.7 job listings for every unemployed person down sharply from 1.9 in January — a ratio closely monitored by the Fed.
Futures markets, which were leaning towards a final Fed hike to 5.0-5.25% next month, became ambiguous afterwards and are again split 50-50 over whether there will be any further tightening at all – and are now drawing an easing of more than 60 basis points by the end of the year.
More importantly, the two-year Treasury yield fell more than 20 basis points on the day to hover just above 3.8% on Wednesday. The dollar fell to its lowest level in more than two months.
However, many Fed officials doubt that the game is already won.
Although Loretta Mester, chief executive of the Cleveland Fed, was not an election politician this year, she said late Tuesday that this year she is “moving a little further into the hawkish territory, with the fed funds rate rising above 5% and the real Fed Funds rate remains in positive territory for some time.”
And that underscores one of the mysteries the markets grapple with. If the Fed were indeed done and dusted with CPI still at 6%, real inflation-adjusted Fed interest rates would peak in negative territory.
Even if it were positive, significant further disinflation would have to be expected as the Fed keeps interest rates high for at least months – all slightly at odds with market prices.
But a more aggressive Fed from here — particularly given March’s bank stress — then raises major recession concerns, and stocks have faltered as that gets back on the radar.
After four straight days of gains to a 6-week high, the S&P500 retreated half a percent on Tuesday and futures were slightly down again.
While rotation into so-called “quality” mega-cap stocks has given the index a boost, overall valuations are still viewed by many as too expensive to factor in a recession. And the S&P500’s full-year earnings growth estimates for 2023 turned negative for the first time this week.
However, recession monitors are still foggy around the world. While manufacturing surveys earlier in the week showed factories lagging behind, Wednesday’s soundings in the services sector were more optimistic, although down in Europe from the start of the month and mixed across countries.
German industrial orders for February surprised on the upside, but machinery orders fell.
And in a sign that not all central banks believe the coast is clear just yet, the Reserve Bank of New Zealand hiked interest rates by 50 basis points to a 14-year high of 5.25%, shattering market expectations of a more modest hike by 25 basis points.
In geopolitics, attention has been focused on the deteriorating China-US relationship.
Taiwanese President Tsai Ing-wen is set to meet US House Speaker Kevin McCarthy on Wednesday at the first such meeting on US soil, a plan that has drawn threats of retaliation from China, which claims self-governing Taiwan.
In banking, UBS executives told shareholders that the unexpected takeover of Swiss rival Credit Suisse in the biggest bank bailout since the global financial crisis was a milestone for the industry and a major challenge for the bank.
Key developments that may provide direction for US markets later on Wednesday:
* US ADP March Private Sector Employment Report, US and Global March Services Sector Survey, US February Trade Report
* IMF publishes chapters of Global Financial Stability Report
* European Central Bank Chief Economist Philip Lane speaks
* US House Speaker Kevin McCarthy plans to meet with Taiwanese President Tsai Ing-wen
* EU Commission President Ursula von der Leyen and French President Macron in China
* US Corporate Earnings: Conagra Brands
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(By Mike Dolan, Editor by Bernadette Baum; [email protected] Twitter: @reutersMikeD)
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