Marketmind: Slower, higher, longer

[November 03, 2022]  A look at the day ahead in U.S. and global markets from Mike Dolan.

If markets thought a Fed 'pivot' might signal an end or even a pause to the U.S. central bank's interest rate rise campaign, they were roundly disavowed of that idea on Wednesday and have had to rethink the rate horizon yet again.

The U.S. Federal Reserve's expected 75-basis-point hike on Wednesday was accompanied by language that allowed it to downshift the size of its hikes to half a percentage point clips from next month - but which also pushed up the assumed peak 'terminal rate' next year and how long rates stay up there.

After a volatile session stocks reacted negatively on Wall Street, with the S&P500 losing more than 2% and the tech-heavy Nasdaq index dropping more than 3%. Markets fell around the world overnight, with Hong Kong's Hang Seng off some 3% after its rally early in the week, and there was no bounce in U.S. stock futures ahead of Thursday's open.
 

U.S. Treasury yields are on the rise again as Fed rate futures now expect a terminal rate as high as 5.15% by May, with pricing for end-2023 rates just shy of 5% too - half a point higher than where futures had priced the terminal rate just one month ago.

The U.S. dollar strengthened across the globe.

With U.S. labour markets remaining tight and the October employment report due on Friday, the Fed would have seen little to change the picture in Wednesday's release of U.S. private sector jobs data.

And monetary tightening proceeds at pace across the world later today as the Bank of England is widely expected to announce a 75bp rate hike - its biggest such move in 33 years.

European Central Bank President Christine Lagarde said the ECB must be "attentive" to Fed policy decisions as it influences global markets - but it cannot just mirror moves in Washington.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 26, 2022. REUTERS/Brendan McDermid

The other market 'hope' of the week was that China may soon lift its draconian zero COVID curbs - but this too dissipated as the country recorded 3,200 daily cases for Nov. 2, the highest level in two-and-a-half months. What's more, China service sector activity contracted again in October.

Energy markets pondered taxation. While some experts feel U.S. President Joe Biden's threat to impose energy windfall taxes would not succeed in Congress, UK press on Thursday reported that British finance minister Jeremy Hunt plans to extend windfall taxes on oil and gas firms there.

In banking, Morgan Stanley is expected to start a new round of layoffs around the world over the coming weeks.

Key developments that should provide more direction to U.S. markets later on Thursday:

* Bank of England policy decision and monetary policy report; Norway and Czech central bank policy decisions

* U.S. Sept trade balance, Q3 Unit Labour Costs, weekly jobless claims, Sept factory goods orders, final Oct S&P Global business surveys

* U.S. Corporate Earnings: Amgen, Starbucks, PayPal, Expedia, Conocophillips, Sempra, Motorola, Consolidated Edison, Warner Bros, Ventas, Moderna, Intercontinental Exchange, Marriott, Kellogg etc

(By Mike Dolan, editing by Emelia Sithole-Matarise [e-mail]. Twitter: @reutersMikeD)

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