Marketmind: Quietly absorbing one more Fed hike

[August 29, 2023]  A look at the day ahead in U.S. and global markets from Mike Dolan

World markets stayed remarkably buoyant even as the chances of one more U.S. interest rate hike have moved firmly onto the radar, with China's bourses extending Monday's rally and the state of U.S. employment now top of mind.

For the first time since before the regional banking crisis in March, U.S. futures now see more than a 50% chance of yet another Federal Reserve rate rise to 5.5-5.75% - where the median of Fed policymaker forecasts from their June meeting still lies. Early Tuesday, futures priced almost a two-thirds chance of that additional quarter-point move in November.

After almost two months of stability in assuming peak rates would be where they are now, the chances of another tightening have been creeping higher again over the past 10 days and appear to be cementing following Fed Chair Jerome Powell's relatively hawkish speech at Jackson Hole on Friday.

And yet - perhaps with the uncertainty dissipating, the economy still robust and bond markets better priced - world markets appear to be taking the tighter odds in their stride.

Wall St's S&P500 clocked only its second-consecutive gain of the month so far on Monday, while MSCI's all-country index is on course for its sixth gain in seven trading days.
 

More impressively in the circumstances, restive bond markets calmed down and bond yields continued to dial back from their highest in over a decade last week. Two-year Treasury yields fell back below 5%, with 10-year yields eyeing their lowest in almost two weeks at 4.17% and equity risk gauges such as the VIX of implied volatility touching two-week lows too.

The dollar was firm, but stayed off last week's near three-month high.

With the Atlanta Fed's real-time estimate of quarterly real GDP growth running as high as 5.9% - about 9% in nominal terms - the Fed will likely need to see some considerable softening of incoming economic data to prevent it moving again.

This week the onus falls largely on the labor markets, with the national payrolls report due Friday but with July readings on job openings due later on Tuesday - alongside August consumer confidence numbers and June house price data.

Friday's August payrolls report is expected to show a slowdown in monthly hiring to about 150,000 but an unchanged unemployment rate of just 3.5%.

A sign is seen outside the 11 Wall St. entrance of the New York Stock Exchange (NYSE) in New York, U.S., March 1, 2021. REUTERS/Brendan McDermid

Overseas, China's embattled stock markets managed to advance for a second day - lifted by a series of support measures and hopes of some detente in the economic and financial standoff between Washington and Beijing amid a three-day visit to China by U.S. Commerce Secretary Gina Raimondo.

Although it gave back the bulk of Monday's 5% early surge by the close of business, China's CSI300 push 1% higher again on Tuesday after weekend measures to slash stamp duty on stock purchases and limit new stock listings. With tech and healthcare sectors leading the way, foreigners were net buyers again on Tuesday.

Just how cash-strapped embattled Country Garden Holdings is will be the focus when China's largest private property developer is due to report its first-half results on Wednesday.

Asia bourses more widely and European indices were higher, while Wall St futures were flat ahead of the open.

Tropical Storm Idalia closed in on Florida's Gulf Coast on Tuesday after skirting past Cuba, headed for a U.S. landfall as a powerful Category 3 storm, prompting authorities to order evacuations of vulnerable shoreline areas.

Events to watch for on Tuesday:

* U.S. August consumer confidence, July JOLTS job openings data, June house prices, Dallas Fed Aug service sector survey

* Federal Reserve Vice Chair for Supervision Michael Barr speaks

* U.S. Treasury auctions 7-year notes

* U.S. corporate earnings: Best Buy, HP, JM Smucker, Catalent, Pinduoduo

(By Mike Dolan, editing by Susan Fenton [e-mail]. Twitter: @reutersMikeD)

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