Marketmind: Markets catch a break

[January 18, 2024]  A look at the day ahead in U.S. and global markets from Mike Dolan

After a rough week of sticky inflation readouts abroad, doused interest rate hopes and scaled-back new year bets, world markets look to have found some foothold.

While the domestic U.S. inflation picture remains pretty benign, incoming numbers on retail, manufacturing and housing this week are all beating forecasts and are making investors wonder if the scale of rate cuts priced for this year will be delivered by a seemingly unhurried Fed.

Hawkish noises from Europe's central bankers have added to downbeat mood.

But the prospect of a recession-free 2024 stateside and continued disinflationary impulses from struggling China and Germany leave the outlook in balance.

And the Fed's latest 'Beige Book' on economic conditions suggest the picture it sees has changed little in the weeks since its December meeting bombshell projected several rate cuts this year.

So, even though Fed rate cut pricing has been dialled back a bit, futures still point to more than a 50% chance of a move as soon as March and a total of 145 basis points of easing through December.

The backup in longer-term bond yields has been sharper, with 10-year yields hitting their highest in a month at 4.12% on Wednesday, even though that's subsided about 5bps again today.

Treasury saw soft demand for a $13 billion auction of 20-year bonds on Wednesday ahead of an expected flood of debt issuance this year. The paper sold at a high yield of 4.423%, about 9bps above where it was trading before the sale and bid-to-cover ratio was the lowest since March.

But attention overseas remained on China after this week's latest series of dour economic updates and worrying demographic data. China's nominal growth last year, taking in a year of price deflation, fell to its lowest since 1976 and its population fell for the second year in a row.

Speculation about fresh stimulus and buying from state-backed investors seemed to steady the market mood there on Thursday however. After initially hitting another 5-year low as foreign net selling hit its highest in more than a year on Wednesday, China's benchmark stock index rallied 1.4% by the close.

Several large-cap ETFs that are favoured investment tools by these state-backed funds, dubbed "national team" investors, saw a spike in trading volume, signalling support from such institutions.

European stocks also perked up, with markets awaiting the release of minutes from the European Central Bank's latest meeting.

People walk around the New York Stock Exchange in New York, U.S., December 29, 2023. REUTERS/Eduardo Munoz/File Photo

And with a mixed picture still coming from the U.S. fourth quarter earnings season, dominated by regional banks today and Friday, Wall St futures are marginally positive going into Thursday's open.

Shares of U.S. chipmakers climbed before the bell after Taiwanese chipmaker TSMC projected more than 20% growth in 2024 revenue on booming demand for high-end chips used in artificial intelligence applications. TSMC's U.S.-listed shares rise 4.8% in premarket trading

Apart from corporate earnings, U.S. housing starts and weekly jobless top the diary.

With an ebbing of U.S. Treasury yields, the dollar was back off one-month highs too.

With worrying geopolitics rumbling in the background - as attacks on Red Sea shipping continued and Pakistan conducted retaliatory strikes on Iran after an early week incident - crude oil prices were firmer.

The International Energy Agency on Thursday made a further upward revision to its 2024 oil demand growth forecast, though its projection remains dramatically lower than producer group OPEC's expectations.

Key diary items that may provide direction to U.S. markets later on Thursday:

* U.S. Corporate earnings: Northern Trust, M&T Bank, Fastenal, Truist, KeyCorp, PPG, JB Hunt Transport

* U.S. Dec housing starts/permits, Philadelphia Fed's Jan business survey, weekly jobless claims

* Atlanta Federal Reserve President Raphael Bostic speaks

* World Economic Forum in Davos - Swiss National Bank Chair Thomas Jordan, European Central Bank chief Christine Lagarde, Eurogroup President Paschal Donohoe and UK finance minister Jeremy Hunt are among the many speakers

* U.S. Treasury auctions 10-year inflation-protected securities, 4-week bills

(By Mike Dolan, Editing by Bernadette Baum; [e-mail])

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