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Marketmind: Cat, mouse and 5%

[November 18, 2022] A look at the day ahead in U.S. and global markets from Mike Dolan.

The cat-and-mouse game between the Fed and financial markets has intensified around 5% peak interest rates next year as next week's Thanksgiving holiday hoves into view.

U.S. Federal Reserve officials have been adamant all week that encouraging signs of disinflation in October would not be enough to deflect them from further monetary tightening - especially if markets loosen financial conditions prematurely.

And just as Treasury bond yields ebbed again this week and U.S. fixed mortgage rates retreated back below 7% in one of the biggest weekly drops in decades, the Fed has pushed back hard.

St. Louis Fed President James Bullard was the latest in a long line to throw cold water on any hopes of a Fed policy pause, saying rates would need to move above 5% from the current 4% to be "sufficiently restrictive" to curb inflation.

The drumbeat had its desired effect. Markets' implied Fed peak rate for next year moved back above 5% again for the first time since the surprisingly soft inflation report last week and two-year Treasury yields reclaimed 4.5%.

The S&P500 closed in the red on Thursday, although stock futures steadied again early on Friday. The dollar slipped back. While the latest U.S. housing starts and business surveys continue to weaken, the labour market remains tight and signs of outright recession remain elusive.

In Europe, the euro, euro bond yields and bank stocks climbed on Friday as the European Central Bank prepared for the start the biggest withdrawal of cash from the euro zone's banking system in its short history. The ECB announcement just after 1100 GMT will detail how much banks plan to repay of the 2.1-trillion-euros ($2.17 trillion), multi-year credit they have taken under Targeted Longer-Term Refinancing Operations.

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The Wall Street entrance to the New York Stock Exchange (NYSE) is seen in New York City, U.S., November 15, 2022. REUTERS/Brendan McDermid/File Photo

Sterling recovered lost ground as investors assessed Thursday's revised British budget from finance minister Jeremy Hunt, who challenged critics of his 55 billion pound tax and spending squeeze by insisting the plan needed to tackle 41-year high inflation. The extent of the squeeze alongside rising interest rates, however, means the government's own budget watchdog now projects two years of outright UK deflationfrom mid-2024.

Fears for the future of social media giant Twitter increased further as hundreds of Twitter employees were estimated to have quit the beleaguered firm following a Thursday deadline from new owner Elon Musk that staffers sign up for "long hours at high intensity," or leave.

The crypto world continued to lick its wounds amid unfolding revelations and reverberations surrounding the collapse of exchange FTX. The executive hired to steer FTX Group through bankruptcy offered his first findings of improper fund transfers and poor accounting, describing it on Thursday as a "complete failure" of controls.

Key developments that may provide direction to U.S. markets later on Friday:

* APEC leaders meet in Bangkok

* U.S. Oct existing home sales

* European Central Bank data on repayment of banks' TLTRO loans; ECB President Christine Lagarde speaks

* Boston Federal Reserve President Susan Collins speaks

* US corporate earnings: JD.com

(By Mike Dolan, editing by Angus MacSwan mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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