What the day ahead in the markets
Mike Dolan gives a look at the day ahead in the U.S. and global markets.
The big consensus bet of 2023 is already in full swing bonds are being bid.
The U.S. 10 and 30 year Treasury yields swooned to their lowest since September on Wednesday, even though they backed up a bit first thing today.
The 30-year long bond yield has lost a full percentage point since its 2022 peak in October, at a low over the past 24 hours of 3.40%. It has gained more than 10% over the past month.
There are some puzzles as to why yields have plunged this week ahead of another interest rate rise from the U.S. Federal Reserve next week, but 2023 recession fears are justified by the incoming data or not. The bond market is screaming a downturn is coming, with the yield curve between 3 months and 10 years closing at its most inverted in more than 40 years.
Three spurs to the move came on Wednesday. The first was plunge in Brent crude oil prices to its lowest level of the year below $77 per barrel on a combination of recession fears, higher inventories and G 7's Russian oil price cap, some 30% less than prevailing world prices.
With the year-on-year oil price gains evaporating to zero, that is dragging inflation expectations down in lockstep.
The second spur was a disinflationary signal from downward revisions to third quarter U.S. labor cost estimates.
The Bank of Canada's dovish rate hike accompanied another half point rate rise with what many read as a signal that it would pause the tightening campaign. It's possible that it's a stretch, but it's seen as an indicator of the mood in other G 7 central banks.
There is now a half point of rate cuts priced between the end of the year, although the U.S. Fed's implied terminal rate for next year is just under 5% for May.
It did not do much for the ebullience in bonds, but it did little to cheer stocks, which investors assume will struggle next year if a recession happens. Wall St futures and most major world bourses remained subdued on Thursday, as the S&P 500 closed in the red for the fourth day.
The Hang Seng benchmark in Hong Kong has now recouped all this year's underperformance against world indices and the S&P 500. With year-to-date losses of just 16%, that is better than the 18% drop for the S&P and 26% fall for China's mainland indices.
The Hang Seng added another 3% on Thursday as the Hong Kong government loosens its COVID 19 curbs further. The isolation period for patients and contacts will be cut to five days from seven days and the requirements for arrivals to Hong Kong to undergo daily tests will be reduced to five days.
After his ousting from office in an impeachment trial on Wednesday, the country swore in a new president after a day of political drama that saw leftist leader Pedro Castillo arrested after his last-ditch bid to cling to power by dissolving Congress.
Key developments that may provide direction to the U.S. markets later on Thursday:
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