A Look at the Day Ahead in US and Global Markets by Mike Dolan
After a stormy Thursday that saw Wall Street stocks catch the Federal Reserve and retreat from a still-healthy economy, today sees a modest step back as other central banks continue to wait and see.
Japan and China’s central banks opted to leave their interest rates unchanged on Friday as they moved in different directions in policy, a somewhat surprising move given the alarming economic slowdown.
The People’s Bank of China unexpectedly left lending rates unchanged at monthly fixings, confounding forecasts after the Fed’s outsized 50 basis point cut on Wednesday. Nearly 70% of market participants polled earlier in the week had seen a cut.
Whether that is just a delay to tie in with broader stimulus plans later is questionable, but it did push the offshore yuan to a new 16-month high, which may not have been helpful for China.
Less surprisingly, the Bank of Japan left policy unchanged on Friday, holding off on further tightening for now but raising its economic assessment, with core consumer inflation rising as expected to 2.8% in August.
With BOJ officials apparently in no hurry to further “normalize” ultra-low interest rates, the yen fell back to near 144 per dollar.
In Europe, the Bank of England also held off on its second rate cut of the year on Thursday, with one eye on the new Labour government’s first budget next month. And that took the pound to its best level since March 2022.
The UK backdrop to both the BoE decision and the Budget was mixed – with consumer confidence falling to a six-month low, although rising retail sales in August beat forecasts. The fiscal picture darkened, however, with news of higher-than-expected government borrowing last month and government debt reaching 100% of GDP for the first time since comparable records began 31 years ago.
On Wall Street, it was still largely a question of ‘what’s not to like?’ for investors.
The Fed’s big rate cut, combined with news of falling weekly unemployment, puts the “soft landing” firmly on track, and all stock indexes rose on Thursday — with the S&P 500 and the equal-weighted version of the index that factors in a handful of mega-cap leaders hitting new all-time highs.
Both the tech-heavy Nasdaq and the small-cap Russell 2000 index hit their highest levels since July.
The S&P500 and Nasdaq are now both up 20% for the year to date. The VIX volatility gauge has fallen below 17 and below its long-term averages.
Fed futures, which are pricing in slightly more easing for the rest of this year than the extra 50 basis points the central bank is signaling, are now set to be cut by 200 basis points over the next 12 months, ending up at 2.9%, where the Fed sees its long-term “neutral” rate now.
US Treasuries appear to be at peace with this, with 2-year Treasury yields hovering around two-year lows of below 3.6% and the new positive yield curve gap for 2-10 years above 10 basis points for the first time in more than two years.
Whether the Fed is easing too much, inflation expectations have risen slightly but are still just above the Fed’s 2% target. Crude oil prices have risen slightly this week, in no small part because of renewed tensions in the Middle East, but annualized oil price losses have been solidly above 20% for two weeks now.
With attention now focused on other central banks, the dollar index rose slightly from the year’s lows.
Stock futures fell slightly from new records before Friday’s bell.
Attention will likely shift over the next week to a host of Fed officials weighing in on the issue, who may be able to shed more light on the thinking behind this week’s big rate cut.
The end of the quarter is also in sight and of course the November election campaign is starting to get underway.
According to the latest polls, the two main presidential candidates are roughly tied nationally, although Democrat Kamala Harris is still the slight favorite in the betting markets.
Key developments that should provide more direction for US markets later on Friday:
* Eurozone consumer confidence September; Canadian producer prices August
* Philadelphia Federal Reserve President Patrick Harker speaks; European Central Bank President Christine Lagarde and International Monetary Fund Managing Director Kristalina Georgieva speak in Washington; Bank of Canada Governor Tiff Macklem speaks; Bank of England Policymaker Catherine Mann and BoE Executive Director David Bailey speak
(By Mike Dolan, editing by Kevin Liffey; mike.dolan@thomsonreuters.com)
