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Marketmind: Seven up - oil-fueled rally turns to Powell

[November 08, 2023] A look at the day ahead in U.S. and global markets from Mike Dolan

Wall Street stocks' longest winning streak in two years - clocking seven straight daily gains - has been underscored by a slump in crude oil prices to their lowest in over three months - reining in inflation expectations and worrisome bond yields.

Partly due to global demand worries, partly on record U.S. production and partly on ebbing supply concerns surrounding the Gaza conflict, U.S. crude prices have now plunged more than 15% in less than three weeks. And that's hit home by dragging U.S. pump prices down to levels not seen since March.

Along with the cooling labor market and Tuesday's data on rising credit card delinquencies, softer energy prices have pulled two-year U.S. inflation expectations in the bond market to just 2.2% - their lowest in almost a month.

Decent demand at Tuesday's 3-year Treasury auction also helped calm recently restive bonds as $40 billion of 10-year notes go under the hammer later today.

The overall picture should prove a relief to Federal Reserve Chair Jerome Powell, who's due to speak on Wednesday alongside another long list of senior Fed colleagues - with European Central Bank boss Christine Lagarde and Bank of England chief Andrew Bailey also scheduled to speak in a packed diary.

Despite the signs of a U.S. economic slowdown in the fourth quarter - where the Atlanta Fed's real-time model is showing a sharp slowdown to 1.45% annualized growth from 4.9% in Q3 - Powell's colleagues speaking on Tuesday gave a mixed review of what they felt still needed to be done on policy.

The usually hawkish Fed board governor Michelle Bowman stuck to her line that one more Fed hike was likely to be needed, while the more dovish Chicago Fed president Austan Goolsbee indicated recent bond market tightening should hold the Fed back.

Striking a balance between the two, Fed board governor Christopher Waller signalled the situation was still being closely monitored - between what was a 'blowout' third quarter for the U.S. economy and the bond market 'earthquake' that followed.

Overall, U.S. 10-year yields remained on the back foot at 4.57% first thing and ahead of Wednesday's auction.

Although Asian and European stocks fell back a bit, Wall St stock futures were unchanged before the bell. The ViX volatility gauge was also steady after clocking its lowest close on Tuesday since mid-September.

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Federal Reserve Board Chairman Jerome Powell answers a question during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., November 1, 2023. REUTERS/Kevin Lamarque/File Photo

The dollar was firmer, extending gains against sterling in the particular as UK government bond yields swooned on a combination of bets on a BoE cut as soon as midyear 2024 and no new tax cuts in UK government budget plans.

Japanese government bond yields also fell to their lowest in two weeks even as Tokyo said it was set to issue close to 9 trillion yen ($60 billion) in bonds in its second extra budget to fund a planned 13.2-trillion-yen economic package aimed at easing living costs.

Chinese stock indexes ended lower again, even as property shares rallied on a Reuters report that Ping An Insurance had been asked by government to take a controlling stake in embattled developer Country Garden. Ping An's stock plunged 5%.

Elsewhere, U.S. markets were eyeing key gains for Democrats and abortion rights advocates in a string of electoral victories on Tuesday, including in conservative Ohio and Kentucky.

The results were seen as an early signal that reproductive rights remain a potent issue for Democrats ahead of the 2024 presidential race and offset opinion polls earlier in the week showing former President Donald Trump favourite in some key states for a return to the White House next year.

Key developments that should provide more direction to U.S. markets later on Wednesday:

* Federal Reserve Chair Jerome Powell, Fed Vice Chair Philip Jefferson, Fed Vice Chair for Supervision Michael Barr, Fed Board Governor Lisa Cook and New York Fed chief John Williams all speak; European Central Bank President Christine Lagarde and Bundesbank President Joachim Nagel both speak; Bank of England Governor Andrew Bailey speaks

* Euro zone finance ministers meet in Brussels

* U.S. Sept wholesale inventories and sales

* U.S. corporate earnings: Walt Disney, Warner Bros Discovery, MGM Resorts, Biogen, Ralph Lauren, Atmos Energy, Corteva, Ameren, Fleetcor, Kallanova etc

* U.S. Treasury auctions $40 billion of 10-year notes

(By Mike Dolan; Editing by Toby Chopra; mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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