Marketmind: Inflation 'blip' or brave new world?
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[March 03, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
There was a sense of hesitation in world markets on Friday about whether
dramatic re-pricing of U.S. and European interest rate horizon over the
past month was an overreaction and a New Year economic burst might prove
to be a temporary fillip.
Many central bank officials certainly seemed less quick to judgment.
U.S. Federal Reserve officials wrestled on Thursday with whether recent
data showing inflation, jobs and spending all hotter than expected was a
flash in the pan.
"It could be that progress has stalled, or it is possible that the
numbers released last month were a blip," said Fed Governor Christopher
Waller. Atlanta Fed President Raphael Bostic urged a "slow and steady"
course of policy response.
Coming ahead of next week's congressional testimony from Fed chair
Jerome Powell and the critical February employment report, the comments
seemed to calm the horses in markets - where borrowing rates had soared
all week.
That take followed comments earlier in the week from Bank of England
chief Andrew Bailey that further UK rate hikes were not "inevitably"
needed.
An almost 10 basis point recoil in the two-year Treasury yield from
15-year highs seems to have been enough to give stocks a lift late on
Thursday and into the weekend. Ten-year Treasury yields are just about
clinging to the 4% handle they assumed only on Thursday.
The resilience of stock markets more generally to the week's bond market
quake is notable and slightly puzzling - with implied volatility in
bonds climbing sharply while stock market equivalents subside.
One argument for that is that the central banks may indeed hesitate to
drive economies into recession and accept a slightly higher level of
inflation. Two-year U.S. inflation expectations in the Treasury market
climbed to 3% from 2% since early last month.
What's more, a proxy Fed funds rate modelled by Fed researchers -
showing the true level of policy tightness when you incorporate Fed
guidance, market transmission and use of the Fed's balance sheet - was
already as high as 6.3% at the end of February. That's 170bp above the
prevailing policy rate.
There was some marginal cooling in incoming business surveys too on
Friday. There was confirmation the recovery in euro zone business
activity gathered pace last month but it was slightly less hot that
early "flash" readings.
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A U.S. flag is seen outside the New York
Stock Exchange (NYSE) in New York City, U.S., January 26, 2023.
REUTERS/Andrew Kelly
Activity in China's services sector, on the other hand, expanded at
the fastest pace in six months.
Elsewhere, there was some concern about the very remit of central
banks. British lawmakers said on Friday that they were launching an
inquiry into how the Bank of England's operational independence was
functioning.
In corporate news, shares in India's embattled Adani surged almost
20% on Friday after a surprise $1.87 billion investment in the group
by boutique investment firm GQG Partners eased concerns about the
conglomerate's ability to attract funds. An Australian pension fund
client of GQG Partners questioned the firm for more information
about its move.
British chip technology firm Arm, owned by Japan's SoftBank, said on
Friday it would pursue a US-only listing this year, dashing the
hopes of the British government that the tech giant would return to
the London stock market.
In banking, Bank of America and Citigroup <C.N> have cut some
investment banking jobs in Asia, joining global peers in paring
headcount as China dealmaking slows.
Key developments that may provide direction to U.S. markets later on
Friday:
* U.S. and global Feb service sector surveys
* U.S. Federal Reserve Board Governor Michelle Bowman, Atlanta Fed
President Raphael Bostic, Dallas Fed chief Lorrie Logan and Richmond
Fed chief Thomas Barkin all speak
* U.S. President Joe Biden meets German Chancellor Olaf Scholz at
the White House
* Foreign ministers of the Quad countries — the United States,
Japan, Australia and India — meet in New Delhi
(By Mike Dolan, editing by Jane Merriman mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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