MARKET WRAPS
Watch For:
E.U. retail trade; U.K S&P Global/CIPS Construction PMI, Bank of England Decision Maker Panel data, BRC-Sensormatic IQ Footfall Monitor; Germany manufacturing orders; trading updates from Bang & Olufsen, Currys, Deliveroo, Persimmon, Entain, Norwegian Air Shuttle
Opening Call:
European stock futures were tracking lower early Thursday on a negative lead from Wall Street following hawkish Fed minutes. In Asia, stock benchmarks fell; the dollar gained slightly; Treasury yields and oil futures were mixed; while gold futures declined.
Equities:
European stocks may track lower on Thursday following hawkish Fed minutes, as focus shifts to the coming U.S. jobs data.
Nearly all Fed officials expect additional rate increases this year, according to the minutes, reinforcing market expectations.
Fed staff said a recession remains likely, though its potential starting point has been pushed back.
"Now the question is, 'How long will they have to keep rates above 5%?'" said Paul Mielczarski, head of global macro strategy at Brandywine Global Investment Management.
"Previously markets were expecting a very quick reversal of this tightening cycle, with meaningful rate cuts by the second half of this year. Now that's really been pushed out by at least 12 months."
Jose Torres, senior economist with Interactive Brokers, said the minutes contained little new information that might move markets.
"Everyone knows that the Fed wants to move higher," he said.
Instead of reacting to the minutes, the market appeared to be "learning to live with higher yields," which is boosting investors' hopes that the torrid year-to-date rally in U.S. stocks might have more room to run, Torres said.
New York Federal Reserve President John Williams on Wednesday said incoming data pointed to the need for higher interest rates.
"I think we have more work to do," Williams said, during a moderated discussion at the annual meeting of the Central Bank Research Association.
"I think the incoming data support that hypothesis," he added.
Williams said some of the broader negative effects, like those on consumer spending, "might take a year or two" to hit the economy, suggesting he thinks there are some more effects to come.
Focus now shifts to the ADP jobs data and ISM services figures on Thursday, and the monthly non-farm payrolls on Friday.
Also on the radar is U.S. Treasury Secretary Janet Yellen's visit to Beijing to ease recent strains over trade, technology, and Taiwan.
Forex:
The dollar rose slightly early Thursday.
If U.S. data this week--including ADP jobs data and ISM services figures on Thursday, and the monthly non-farm payrolls on Friday--are strong, the dollar could rise as markets start to expect the U.S. Federal Reserve to increase rates beyond July, Rabobank said.
"Stronger-than-expected data could boost the prospect of another Fed rate hike beyond July and underpin the dollar near-term," it said.
For now, the market "remains reluctant to price in further rate hikes beyond July," Rabobank said.
However, any dollar rise could be short-lived due to "the likelihood that the U.S. economy will be slowing into year-end."
Meanwhile, low levels of EUR/USD implied volatility--a measure of options pricing that indicates expected future moves--looks complacent given a shaky eurozone economy, Societe Generale said.
EUR/USD implied volatility has decreased toward levels of realized volatility--which measures previous currency fluctuations--and "appears to reflect market complacency, as the euro area has recently faced a series of negative economic surprises and entered a technical recession."
Implied volatility could now increase as steep interest-rate rises take their toll, it said.
"Monetary tightening mechanically comes at the expense of future growth."
EUR/USD 3-month implied volatility was at around 6.425%, down from levels above 8.6% at the start of the year, according to Refinitiv data.
Bonds:
Treasury yields were mixed in Asia after minutes of the Federal Reserve's June meeting showed nearly every policymaker agreed on the need for more interest rate hikes this year.
Friday's U.S. nonfarm payrolls report for June is the highlight of the week and is likely to influence the Fed's thinking on any additional monetary tightening.
Traders were pricing in a 88.7% chance that the Fed will raise its key interest rate by another 25 basis points in its July meeting, according to CME FedWatch Tool.
Traders also slightly boosted the chance of a similar-size hike in September to 73.2%.
The central bank is expected to take its fed-funds rate target back down to around 5%, or lower, next year.
"Although there is still another round of monthly CPI and labor market data, covering June, before the FOMC meeting in late July, barring an unexpected collapse, the odds strongly favor another 25bp rate hike this month," Capital Economics said.
"Although officials might be eyeing a final hike in September too, we suspect that more marked signs of a slowdown in both core inflation and the real economy will ultimately persuade the Fed to hold fast, with rates peaking at between 5.25% and 5.50%."
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Capital Economics said it expected the spreads on U.S. corporate bonds could widen on growing concerns about an economic slowdown in the U.S.
In recent weeks, the spreads on the eurozone and U.K. corporate bonds have widened due to fears about economic downturn while U.S. bond spreads have narrowed.
CE reckoned the divergence between U.S. bond spreads and their eurozone and U.K. peers could end in the coming weeks.
Energy:
Oil prices were mixed in Asia early Thursday.
Saudi Arabia's energy minister reportedly said Wednesday that the kingdom and its allies would do whatever is necessary to support the oil market.
The comments from Saudi Energy Minister Prince Abdulaziz bin Salman at an OPEC+ seminar were reported by a number of news agencies and followed the Saudi's announcement Monday that it would extend its voluntary production cut by another month, through August.
Tensions in the Middle East, following news of an attempt by Iran to seize two oil tankers at the Strait of Hormuz, were also providing support to oil prices.
The "'whatever it takes' mentality and display of unity by OPEC+ can help support oil prices in the near term" and the $70-a-barrel mark is looking to offer initial support again," Tyler Richey, co-editor at Sevens Report Research said.
However, such gains are "unlikely sustainable given the increasing threat of recession" in the second half of this year, which would "almost certainly cripple consumer demand and send WTI below 2023 support at $67," he said.
Drama in the Strait of Hormuz, meanwhile, "reminded us that it's probably not a very good idea" that the U.S. has tapped into its Strategic Petroleum Reserve -- so it has less emergency supplies "if there's actually a real emergency," The Price Futures Group said.
Metals:
Gold futures were lower, extending their declines, as minutes of the Federal Reserve's latest policy meeting showed some central bank officials pushed for a June interest-rate hike.
Investors were now awaiting Friday's U.S. jobs report for further guidance on the central bank's plan for interest rates.
A robust U.S. jobs report is "likely to deal a heavy blow to the zero-yielding metal, sending prices back below $1,900, with $1,893 and $1,858 acting as key levels of support," said FXTM.
On the other hand, should gold prices push back above $1,932, with bulls gaining further support from a soft U.S. jobs report, this could open the doors back toward $1,959 and $1,985, respectively," it said.
However, Kinesis Money outpointed that the "fragile market confidence and a dip in equities on the back of concerns about the health of the global economy has seen investors keen to keep hold of their safe haven gold assets."
Downbeat economic data released in the U.S., China, and elsewhere in the past few days has helped to revive demand for gold, although the Fed and other central banks around the world are planning more interest-rate hikes.
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Copper edged higher early Thursday amid mixed signals.
The base metal's price has been weighed by recent data pointing to further weakness in economic growth in China and the U.S., ANZ Research said.
However, weak supply growth and low inventories have been limiting the downside of copper prices, it added.
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Iron ore prices were slightly higher in China's trade.
After a steep rally since late May, the steelmaking ore's prices have retreated in recent sessions and analysts advise caution in trading the commodity in 2H.
Steel production, a main source of iron ore demand, may cool over the coming months, as peak seasonality passes and producers schedule more facility maintenance that could disrupt output, Funeng Futures said.
Rising market worries over potential steel output curbs by Beijing could further weigh on trading sentiment and buying interest.
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