Thursday, December 1

Downbeat on the downshift


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A look at the day ahead in US and global markets from Mike Dolan.

The recent burst of stock market optimism around the world still seems to be on shaky ground.

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Despite expectations the US Federal Reserve will signal a much-vaunted ‘downshift’ in its rate rise campaign from next month – following a fourth straight 75 basis point rise on Wednesday – the incoming economic numbers won’t play ball.

A jump in US monthly job openings threw another confounding bit of data for its policy meeting this week, with more evidence that rapid interest rate increases have yet to bite hard in the real economy as core inflation stays sticky.

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Although it closed in the red on Tuesday, Wall St has been chomping at the bit over this potential pivot for two weeks and stock futures were higher again going into the Fed meeting on Wednesday.

While there’s been some considerable rotation toward ‘quality’ or ‘value’ stocks with high dividends – with Dow Jones industrials outperforming the once go-go growth stocks of the Nasdaq – global indices are clinging to their 10% bounce since early last month.

But bonds and money markets are perhaps more realistic, with pricing for the Fed’s peak ‘terminal rate’ next year back above 5% and three and 12-month Treasury bill rates hitting their highest in 15 years at 4.2% and 4.8% respectively.

In the absence of more severe signs of economic slowdown, the rates market clearly still sees the Fed hiking hard and staying up there – much as Fed officials have been insisting.

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The other slightly peculiar source of global market optimism this week has been unverified speculation over the past 48 hours that China will ease its draconian zero COVID rules in March.

Apart from the fact that March is still four months and some two quarters of economic numbers away, there’s still no source to that chatter and officials have batted it away.

China and Hong Kong stocks and the yuan ended higher for a second session on Wednesday, helped in part by official noises from central bank governor Yi Gang and others about keeping the yuan stable and hoping for a soft landing in the country’s crumbling property sector.

The COVID news didn’t improve, however. A Chinese industrial park that hosts an iPhone factory belonging to Foxconn announced fresh lockdowns on Wednesday, raising questions about how the Apple supplier quells discontent at the factory.

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As the world’s banking leaders gathered in Hong Kong amid an approaching typhoon, HK leader John Lee pitched the city’s connection with China as a reason to stay invested despite the Chinese territory’s COVID-hit image as a major financial hub.

UBS Group Chairman Colm Kelleher said that the bank keenly awaited the next step in China’s management of the pandemic. “We are waiting for zero COVID and the opening up of China to see what will happen.”

In Japan, Bank of Japan Governor Haruhiko Kuroda hinted at the chance of tweaking the bank’s yield curve cap (YCC) down the road, saying it could become a future option if inflation continues to pick up.

The latest North Korea missile launches added to already tense geopolitics.

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In Europe, markets awaited the Bank of England’s latest interest rate decision on Thursday – with the bank’s biggest rate rise in 33 years forecast.

Key developments that should provide more direction to US markets later on Wednesday: * US Federal Reserve policy decision and press conference from Fed Chair Jerome Powell * US Oct ADP private sector employment, * US Corporate Earnings: eBay, MetLife, MGM, Paramount, Yum !, Estee Lauder, CVS, Zillow, Roku, Vulcan, Qualcomm, Ingersoll Rand, Albemarle, Lincoln National, Lumen Technologies, Emerson Electric, Booking Holdings, ETSY, Allstate, Marathon

(By Mike Dolan, editing by Nick Macfie mike.dolan @reutersMikeD)

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