Marketmind: Rate cut cat-and-mouse game
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[January 16, 2024] A
look at the day ahead in U.S. and global markets from Mike Dolan
A shortened U.S. markets week starts on the back foot as Friday's
slightly peculiar interest rate cut ebullience cools a touch again while
U.S. banking giants resume the corporate earnings season.
Wall St has a lot to unpack from a three-day weekend packed with
political developments home and abroad.
Taiwan's ruling Democratic Progressive Party won the presidential
election, but lost its majority in parliament. And oil and natural gas
prices continued to shrug off ongoing threats and attacks on Red Sea
shipping after U.S. and UK forces hit back at Houthi protagonists in
Yemen late last week.
Donald Trump secured a resounding win in the first 2024 Republican
presidential contest in Iowa on Monday, largely as expected and
asserting control over the party as he seeks an election rematch with
President Joe Biden.
But U.S. congressional leaders managed to agree on a stopgap spending
bill to keep the federal government funded into March and avert a
partial government shutdown starting late next week.
But it's the Federal Reserve rate cut picture that still dominates, with
what seemed at first like a mixed picture on inflation from consumer and
producer price reports for last month eventually spurring rate cut
speculation even more due to a read-across to the Fed's favored PCE
measure.
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Falling input prices and soft components of the CPI that have bigger
weightings in the PCE inflation gauge due next week have actually
prompted some banks to cut their forecast on the latter, with six-month
annualized PCE inflation seen falling below the Fed's 2% target.
Barclays, for one, brought its forecast for the first Fed cut to March
from June as a result.
Although some central banking pushback again since, mainly from European
officials over the weekend, has dampened that speculation a little and
sees a more negative start to the week, pretty aggressive easing remains
in the price.
While ECB officials talk tough and managed to nudged rate cut bets there
into April, the weakness of Germany's economy last year and plunging
inflation expectations among European households support bullish rate
markets.
Bank of England chief Andrew Bailey, speaking in parliament later on
Tuesday, will also be cheered by news of ebbing wage inflation.
U.S. rates markets continue to chomp at the bit.
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People walk around the Financial District near the New York Stock
Exchange (NYSE) in New York, U.S., December 29, 2023.
REUTERS/Eduardo Munoz/File Photo
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Fed futures still see almost 160 basis points of rate cuts this
year, with more than a 70% chance they start in March.
Two-year Treasury yields - which had plunged to their lowest since
May on Friday - have firmed up about 10bps since to 4.21%, but
ten-year yields remain unchanged. A sharp disinversion of the
2-10-year yield curve this month to its narrowest levels in about 18
months took a breather Monday.
A record 91% of global investors expect lower short-term bond yields
in 12 months' time, a January survey of fund managers published by
Bank of America on Tuesday showed.
With Goldman Sachs and Morgan Stanley up later in what's been a
mixed fourth quarter earnings picture for the big banks so far, Wall
St stock futures were off about 0.5%.
Some merger activity also caught attention.
U.S. private equity firm General Atlantic said on Tuesday that it
has entered into an agreement to buy UK-based infrastructure
investor Actis.
And brokerages Panmure Gordon and Liberum on Tuesday announced an
all-share merger to create what they say will be the UK's largest
independent investment bank.
Key diary items that may provide direction to U.S. markets later on
Tuesday:
* U.S. corporate earnings: Goldman Sachs, Morgan Stanley, PNC
* New York Fed Jan manufacturing survey; Canada Dec inflation,
housing starts
* Federal Reserve Board Governor Christopher Waller; Bank of England
Governor Andrew Bailey testifies to parliament;
* World Economic Forum in Davos
* ECOFIN meeting of European Union finance ministers, with European
Central Bank board member Luis de Guindos attending
* U.S. Treasury auctions 3-, 6-month bills
(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com)
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