Marketmind: Bonds calm down but Chinese markets smolder
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[August 16, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
Restive bonds showed signs of calm on Wednesday, but China's struggling
economy and markets continue to unnerve world markets.
A twin jolt from resurgent western debt yields and China's deepening
economic funk and property sector troubles have made for a bumpy August
to date.
As 10-year Treasury yields hit their highest in almost 10 months on
Tuesday, following a surprisingly racy U.S. retail sales readout for
July, Wall St stocks swooned again - with the S&P500 recording only its
third daily drop of more than 1% over the past three months.
The sales update prompted Goldman Sachs to raise its third-quarter U.S.
gross domestic product tracking estimate by a whopping seven-tenths of a
percentage point to a 2.2% annualized rate - almost as fast as the 2.4%
growth rate in the April-June quarter.
Overseas news of record British wage growth and sticky core inflation
and a re-acceleration of Canadian headline inflation all added to the
mood over the past 24 hours.
But even though red-hot U.S. retail demand may raise concerns about the
extent of further disinflation and any hopes of Federal Reserve rate
cuts over the horizon, it was accompanied by more downbeat soundings
from the U.S. housing market and manufacturing sentiment.
July data on industrial production later on Wednesday may reflect more
of the latter.
As to Fed thinking, minutes from its most recent policy meeting are also
due out today - but Minneapolis Fed chief Neel Kashkari insisted it was
still too early to say the central bank's rate rise campaign was over.
"I'm not ready to say that we're done."
But Treasury yields have come off the boil ahead of today's session, and
10-year yields slipped back below 4.2% - in part as oil prices retreated
further on China's deepening economic problems. After a slew of dour
retail, industrial and property investment numbers earlier this week,
China reported on Wednesday that home prices fell for the first time
this year.
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Raindrops hang on a sign for Wall Street
outside the New York Stock Exchange in Manhattan in New York City,
New York, U.S., October 26, 2020. REUTERS/Mike Segar/File Photo
That saw Chinese and emerging market stocks fall further and the
yuan hit a new low for the year as the yield premium on 10-year U.S.
Treasuries over Chinese equivalents hit its highest in 16 years.
But U.S. Treasuries were also calmed on Wednesday by news that
foreign investors increased their holdings in June - albeit before
the latest wobble in prices.
Steadier bonds today have helped a modest uptick in S&P500 futures
ahead of the bell - though pressure on banks on Tuesday was another
background fallout from ratings firm Fitch's recent decision to
remove the United States' AAA sovereign rating. Fitch said it could
downgrade multiple big banks as a result and that hit shares of
JPMorgan Chase, Bank of America and others.
Elsewhere, the dollar fell back a little in line with softer bond
yields - with sterling one of the main beneficiaries as the
combination of Wednesday's stubborn UK core inflation reading for
July and the wage picture have pushed Bank of England rate rise
expectations higher.
New Zealand's central bank left rates on hold, but a hawkish message
suggested rates stay high and the kiwi dollar got a lift from that.
Events to watch for on Wednesday:
* U.S. corporate earnings: Target, Cisco, Amcor, Synopsys, TJX
* U.S. July industrial production and housing starts/permits, New
York Fed August services survey, Canada July housing starts
* U.S. Federal Reserve meeting minutes
(By Mike Dolan, editing by Emelia Sithole-Matarise; mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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