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Marketmind: Elusive peaks

[February 17, 2023] A look at the day ahead in U.S. and global markets from Mike Dolan.

Try as they might to view the glass as half full and see relief in avoiding recession, investors just can't get away from the relentless grind higher in U.S. interest rates.

Booming retail sales, a super tight labour market, sticky consumer price inflation and now the biggest gain in producer prices in seven months all paint a clear enough picture of the new year so far to have the Federal Reserve stamping its feet hard again.

Unlike much of last year, the rates market is now inclined to believe the central bank on the direction of travel.

Two Fed officials on Thursday said the central bank probably should have lifted rates more than it did early this month and warned more hikes were now essential to get inflation back to target.

Goldman Sachs said it now expects three more quarter-point rate rises this year - in March, May, and June - to a peak target range of 5.25%-5.5%. Bond manager PIMCO also sees the Fed changing its projections to show that as the new high.

Fed futures are moving in tandem - now pricing a July 'terminal rate' of 5.30% for the first time, almost a half percentage point higher than pencilled in late last year. And implied year-end rates are as high as 5.12% - almost half a point higher than where the current rate sits.

Unsurprisingly, bonds - so many investors' asset class of choice this year - are cowering at the prospect.

Two-year Treasury yields hit a three-month high at 4.72% on Friday, with 10-year yields at 3-month peaks too - homing in on 4% for the first time since November.

Perhaps just as worrying for the Fed and investors alike is the rise in 10-year "breakeven" inflation expectations to 2.41% - their highest in a year.

Jarring for many indebted emerging economies around the world, the dollar is surging again. The dollar's DXY index hit its highest since early January and is now up 3.5% from this month's lows, with the dollar/yen pairing reaching the highest level of the year so far.

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Shoppers carry bags of purchased merchandise at the King of Prussia Mall, United States' largest retail shopping space, in King of Prussia, Pennsylvania, U.S., December 8, 2018. REUTERS/Mark Makela

So as impressive as this week's stock market resilience had been to the new inflation and rates environment, it appears to be buckling again already. The S&P500's 1.4% loss on Thursday was its biggest in a month, the Nasdaq had its worst day of the month so far and S&P futures are deep in the red again on Friday. Share markets around the world shivered too.

Overseas, the UK's FTSE 100 blue-chip index and France's CAC 40 fell back from this week's record highs - with the earnings season still in full swing in Europe.

NatWest shares plunged 9% after it warned rising interest rates may not deliver the long-lasting earnings bonanza investors hope for, even though profit jumped by 33% last year.

There was some better news in UK retail and hopes of a breakthrough in Britain's log-jammed post-Brexit trade talks with the European Union.

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

* U.S. Jan import and export prices, leading indicator. Canada Jan producer prices.

* U.S. Federal Reserve Board Governor Michelle Bowman and Richmond Federal Reserve President Thomas Barkin speak. Bank of France chief François Villeroy de Galhau speaks.

* U.S. corporate earnings: Deere, PPL, Centrepoint Energy.

(By Mike Dolan, editing by Emelia Sithole-Matarise; mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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