Marketmind: A spooky Friday 13 for bonds?

[October 13, 2023]  A look at the day ahead in U.S. and global markets by Dhara Ranasinghe.

Investors in U.S. Treasuries have good reason to feel on edge on a day (Friday 13) many consider unlucky, according to Western superstition.

After all, news on Thursday that U.S. consumer prices increased in September due to a surprise surge in rental costs sparked a fresh selloff in world bond markets with 30-year Treasury yields jumping by almost 20 basis points at one point.

Such moves, alongside weak demand at auction of U.S. 30-year bonds on Thursday is a reminder that sentiment in the world's biggest fixed-income markets remains fragile at best and the sharp gyrations of recent weeks are far from over.

With the weekend approaching and investors keen to hold on to safe assets, given heightened uncertainty created by war in Israel, U.S. and European government bond yields were lower on Friday.

No doubt latest U.S. inflation data has revived worries of further tightening from the Federal Reserve, with markets pricing about a 40% probability of a rate hike in December, versus a roughly 28% chance seen before the CPI report.

French annual inflation was slightly higher than initially measured in September, at 5.7%, as higher prices in the energy sector outpaced easing price increases in the food sector as well as in services, data on Friday showed.

And the flip side to still relatively high inflation in the West is weak price pressures in China, the world's No.2. economy.

A mixed batch of Chinese data on Friday that showed a narrowing slump in merchandise trade, and the persistence of deflationary pressures underlined the challenges policymakers face in trying to engineer a durable economic recovery.

For the rest of the day, it's earnings - bank earnings to be specific - that move into the market spotlight.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 28, 2023. REUTERS/Brendan McDermid/File Photo

Big banks including JPMorgan Chase, Wells Fargo and Citigroup report their quarterly numbers before the U.S. market open.

The biggest U.S. consumer lenders are set to post higher third-quarter profits, in contrast with investment banks still facing a deal-making slump, according to analysts.

Judging by trade in the options markets, traders are positioning for larger-than-usual share swings after the earnings, especially in Wells Fargo.

That suggests the potential for increased market volatility and perhaps not a quiet end to the week.

Tighter U.S. rules on shipments of AI chips and chip-making tools to China are also in focus.

The Biden administration is considering closing a loophole that gives Chinese companies access to American artificial intelligence (AI) chips through units located overseas, according to four people familiar with the matter.

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

* University of Michigan survey

* Fed Reserve Bank of Philadelphia President Patrick Harker speaks

* Earnings: UnitedHealth, JPMorgan, Citigroup, Wells Fargo

(Reporting by Dhara Ranasinghe; Editing by Hugh Lawson)

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