- European stocks plummet in early trade
- US 2-year yields near 15-year high, dollar near 3-month high
- China stocks falter, Yuan weakens on weak inflation data
- Nikkei rose 0.6%, Yen strengthened as Ueda was confirmed as the next BOJ governor
- Powell reiterates hawkish forecast, March lift size is ongoing
LONDON, March 9 (Reuters) – Global markets sat in a rare doldrums on Thursday ahead of the week-ending US jobs data that could easily trigger more cross-asset storms.
European equity markets started marginally lower, although there was little movement from either the Dollar/FRX or the bond markets, where recession warnings became increasingly strident again. /US
Federal Reserve Chairman Jerome Powell stuck to his message of higher and potentially faster rate hikes at a hearing on Wednesday, but said the decision would depend on the strength of incoming data.
This means traders will be looking even harder at US jobs data on Friday and then US inflation figures following Tuesday.
Financial markets are now pricing in a nearly 80% probability of a 50 basis point rate hike at the Fed’s March meeting, up from around 30% earlier in the week. There is also a growing expectation that the US Federal Reserve could hike rates to 6%.
“Our core view is that 5.5% will do, but they (the Fed) need to stay there longer than the market is expecting,” said Iain Cunningham, co-head of multi-asset growth and co-portfolio manager at Ninety One Global Macro Allocation Fund.
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“A US recession is our central scenario,” he said, adding that the fund was still heavily long the dollar, particularly against currencies like the Canadian dollar and sterling.
The US Dollar Index, which measures the value of the greenback against a basket of key peers, hovered near a three-month high at 105.57. However, it lost 0.4% against the Japanese yen at 136.78 per dollar.
Japan’s lower house of parliament confirmed the government’s nominee Kazuo Ueda as the next central bank governor on Thursday, confirming a new leadership tasked with overseeing an exit from ultra-loose monetary policy.
However, the Bank of Japan is expected to stick to what it calls yield curve control and ultra-low interest rates at its current governor’s final meeting on Friday.
Ten-year government bond yields again hit the BOJ’s policy ceiling of 0.5% on Thursday.
The greenback was also buoyant against the Canadian currency at CA$1.3803, its highest in nearly four months, thanks to a dovish Bank of Canada which kept interest rates unchanged on Wednesday.
China’s yuan, meanwhile, weakened towards the key psychological level of 7 per dollar after the slowest annual CPI data in a year, raising doubts about the strength of its economic recovery.
BACK TO THE 80’S
Benchmark government bond markets remain the main lightning rod for both interest rate expectations and the magnitude of the pain the sharp rises are likely to inflict on the global economy.
Two-year Treasury yields remained close to a 15-year high at 5.04%, while benchmark 10-year yields remained steady at 3.9953%.
Most notable is the gap between shorter-dated 2-year and longer-dated 10-year Treasury bond yields, which stood at negative 108.2 basis points. This was the most extreme inversion since 1981. Inversions are considered reliable indicators of a recession.
Also in Europe, the German 2s10s curve has been the most inverted since 1992, with 2-year German yields at a post-2007 peak of 3.35% and 10-year yields at 2.68%.
“Powell acknowledged that the March decision is data dependent,” said Thierry Wizman, Macquarie’s global FX and rates strategist. “The question we face, therefore, is whether the economic reacceleration in January was an outlier or a trend.”
Payroll caution meant both S&P 500 futures and Nasdaq futures were down 0.3%. Indices also struggled on Wednesday after personal payrolls beat consensus estimates and demand for home loans picked up despite higher mortgage rates.
Forecasts for Friday’s key figures are for a modest 205k increase in payrolls after January’s 517k surge prompted markets to reassess monetary tightening expectations.
In Asia, MSCI’s broadest index of Asia-Pacific equities outside Japan (.MIAPJ0000PUS) is down 0.6% overnight after falling 1.4% in the previous session. In contrast, the Japanese Nikkei (.N225) rose 0.6%.
Commodity prices were mostly lower, with Brent crude down to $82.45 a barrel, US crude down to $76.39 a barrel and global growth-sensitive metal copper down 1%. Gold was slightly higher at $1817 an ounce.
Additional reporting by Stella Qiu in Sydney and Joice Alves in London; Editing by Angus MacSwan
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