MARKET WRAPS
Watch For:
EU GDP, employment; Germany industrial production index, Ifo economic forecast; France foreign trade, balance of payments, job creation; U.K. Halifax house price index, KPMG and REC report on jobs; Italy retail sales; trading updates from Direct Line Insurance Group, Melrose Industries, Currys, SAS
Opening Call:
Shares may open lower in Europe on Thursday amid fresh inflation worries. In Asia, stock benchmarks were lower; Treasury yields were broadly lower; the dollar weakened slightly; oil and gold declined.
Equities:
European stock futures are tracking lower early Thursday, on the resurfacing of inflation worries following fresh signs that the U.S. economy could be revving up.
The economy's services sector expanded for an eighth consecutive month in August, according to an Institute for Supply Management index, beating the expectations of economists polled by The Wall Street Journal.
Employment, prices and new orders all jumped from the prior month.
The resilience of the labor market and consumer spending has complicated the work of central bankers trying to tame inflationary pressures with interest-rate increases.
Investors are growing concerned that if the economy doesn't show signs of drag, inflation will turn higher rather than fall toward the Federal Reserve's targeted level.
As rates rise, the availability of higher-yielding alternatives to stocks presses markets, while borrowing is crunched for households and businesses alike.
"Stocks are somewhat overpriced, given this higher-for-longer interest rate environment and the lack of earnings growth. The worse thing that the Fed can do is do nothing and re-spur inflation," said John Luke Tyner, a portfolio manager at Alabama-based Aptus Capital Advisors.
"Our main concern is that the upcoming inflation data accelerates," said Alex McGrath, chief investment officer for Greenville, S.C.-based NorthEnd Private Wealth.
U.S. weekly jobless claims will be closely watched later in the day for any implications for the Fed policy.
Next week brings the closely watched inflation readings, with the consumer-price-index and producer-price-index reports due Wednesday and Thursday, respectively.
Meanwhile, data released early Thursday showed that China's exports declined less than expected in August, pointing to improved external appetite for Chinese products and continued weakness in global trade.
Forex:
The dollar weakened slightly early Thursday paring its gains following yesterday's resilient U.S. economic data, which has left the U.S. looking better than its developed market peers.
"The dollar's rise is starting to unnerve everyone. Last night, both Japanese and Chinese officials attempted to thwart the greenback's rally, but weren't effective," said Edward Moya, senior market analyst at Oanda.
Also, European Central Bank officials were intent on emphasizing the scope for a further interest-rate increase despite a round of dismal German economic data, Moya noted.
"FX talk is cheap if it is doesn't come with convincing data/market conditions that supports decisive and meaningful action," Moya said.
"The ECB will struggle to convince markets they can hike into a deteriorating outlook. Japanese officials are still only about halfway through their best verbal intervention threats. A gradual declining yuan is not China's biggest problem, the property crisis and contagion risks are getting to very uncomfortable levels."
Bonds:
Treasury yields were broadly lower as investors assessed data showing the U.S. economy's services sector continued to expand in August.
Boston Fed President Susan Collins said in prepared remarks on Wednesday that while officials "may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data."
Treasury yields have room to increase, WisdomTree's Kevin Flanagan said.
Both the two-year and the 10-year yields "typically rise to levels that are either at or above the Fed Funds' upper bound, especially as we're around the peak level."
The Fed looks inclined to keep rates in the 5.25%-5.5% range or move them up by 25 basis points.
Even if the long-term yields remain lower than the fed funds rate, "another leg up in Treasury yields, at a minimum, should be considered," by investors, Flanagan said.
Markets are pricing in a 93% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool.
The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is priced at 45.2%, up from 25.9% a month ago.
Energy:
Oil prices moved lower in Asia reversing their recent gains following the recent extension of supply cuts by Saudi Arabia and Russia.
The supply cuts will continue to prop up a fundamentally strong market, said Joe DeLaura, senior energy strategist at Rabobank.
Still, some analysts were uncertain over the possibility that oil will soon reach $100 a barrel.
"The road that could lead crude oil prices toward the $100 [per barrel] psychological mark will likely be bumpy, because higher energy prices have already started being reflected in inflation and inflation expectations," said Swissquote Bank.
As a result, central banks, including the Fed, "will have little choice but to keep their monetary policies sufficiently tight to prevent an uptick in inflation," it said.
"That could mean further rate hikes, or keeping the rates at restrictive levels for longer, in which case, oil prices make a U-turn and cheapen due to recession and global demand concerns."
Metals:
Gold prices were lower pressured by strength in the U.S. dollar and Treasury yields as upbeat economic data backed expectations for a rate hike by the Fed.
"Until the dollar peak is in place and Treasury yields start dropping, gold is going to have a hard time mustering up a rally," Oanda said.
The medium-term direction of gold looks unclear while investors and traders remain unconvinced of the true health of the global economy, said Rupert Rowling, market analyst at Kinesis Money.
Rowling argued that it was "remarkable" that gold managed to continue to trade above $1,900 an ounce with interest rates above 5% in the U.S. and U.K. and near that level in Europe.
"Lingering fears that the world is heading for a recession and market confidence that is still very fragile following shocks such as the U.S. banking crisis earlier in the year have ensured that gold's safe haven qualities have continued to appeal," he added.
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Copper prices were flat early Thursday.
ANZ analysts reckoned that weak economic data in Europe has raised concerns about base-metal demand.
Germany's manufacturing orders fell more than expected in July, further indicating declining demand for goods from the key manufacturing sector of Europe's largest economy.
That comes after business confidence in Germany took another hit in August, with a sentiment gauge falling from the previous month, they said.
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Iron-ore futures declined in Asian trade.
Despite the drop this morning, iron ore prices could get a boost amid expectation for more property stimulus measures, Huatai Futures analysts said, referring to a state media report that said that policies restricting home purchases and property loans were "out of date."
Meanwhile, Vale, the world's largest producer and exporter of iron ore, remains positive about China's iron ore demand, given high operating rates at mills and low inventories of iron ore and steel across the country, ANZ analysts said.
TODAY'S TOP HEADLINES
Chinese Exports Fell Less Than Expected in August
China's exports declined less than expected in August, pointing to improved external appetite for Chinese products and continued weakness in global trade, official data showed Thursday.
Outbound shipments dropped 8.8% from a year earlier, compared with the 14.5% decline in July, the General Administration of Customs said. The result was better than the 10.0% fall expected by economists in a Wall Street Journal poll.
The Middle East Becomes the World's ATM
Five years ago, Saudi officials watched a wave of American finance executives pull out of a free investment confab in Riyadh after the murder of a dissident journalist made the kingdom a toxic place to do business.
This year, the conference, nicknamed "Davos in the Desert," is expecting so much demand it is charging executives $15,000 a person.
A recession could be nine months away, according to this telltale gauge
The roughly $25 trillion Treasury market first began flashing this telltale sign that a U.S. recession likely lurks on the horizon almost a year ago, according to Bespoke Investment Group.
It was late October of 2022 when the 3-month Treasury yield BX:TMUBMUSD03M first eclipsed the 10-year Treasury yield BX:TMUBMUSD10Y, resulting in an "inversion" of a key part of the yield curve that's been a reliable predictor of past recessions.
Russian Strike on Ukrainian City Kills 17
At least 17 people were killed and over 30 injured in a Russian aerial attack on a shopping district in the eastern city of Kostyantynivka, the worst such attack in recent weeks and a fresh sign that Russia is singling out towns near the front lines used by both civilians and Ukrainian soldiers.
The attack came as Secretary of State Antony Blinken arrived in Ukraine on Wednesday to signal the U.S.'s continuing support for the Ukrainian war effort. Earlier that day, Ukraine's air defenses destroyed 23 targets, eight of which were headed for the capital, Kyiv. It also comes as Ukraine steps up efforts to both seize more territory from Russian forces and launch further drone strikes at targets in Moscow and other Russian cities.
U.K. Rejoins EU's Research Funding Program in Sign of Brexit Thaw
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09-07-23 0015ET
