A look at the day ahead in U.S. and global markets from Mike Dolan.
As the world’s major central banks turned the interest rate screw this week and insisted on more tightening ahead, their economies showed more signs of buckling under the pressure.
And while markets lurched lower on the potentially toxic combination of a higher peak for interest rates into a looming recession, there are reasonable questions over whether the central banks will act as tough as they are talking.
U.S. retail sales fell more than expected in November, registering their biggest decline in 11 months. U.S. manufacturing declined 0.6% last month and reports from the New York and Philadelphia Federal Reserve’s showed business conditions in their regions remaining depressed in December.
While business surveys in Europe on Friday showed slightly less gloom, they still marked the sixth straight month of a deep contraction in overall activity. British retail sales slid unexpectedly in November as the cost-of-living crisis eats into household finances.
What had been three months of mostly positive beats on incoming activity numbers worldwide is now turning sour again, with U.S. and global economic surprise indices the lowest since mid-October and on the cusp of turning negative. Graphic: Economic Surprise indices, https://fingfx.thomsonreuters.com/gfx/mkt/akpeqqemopr/One.PNG
All of which is a year-end cold shower for world markets hoping for either light at the end of the tunnel in the central bank campaign or signs of a soft-landing for the economy.
Most hawkish of all the central banks appears to have been the European Central Bank, where the implied peak ECB interest rate in money markets next year has risen almost half a point to 3.25% since Thursday’s ECB announcement and guidance.
Even though after Wall St stocks plunged 2-3% on Thursday, futures remained deep in the red ahead of Friday’s open. European bourses fell another 1% and MSCI’s all-country index was again for the third day in a row at its lowest in over a month.
Led by the jump in euro zone sovereign borrowing rates after the ECB rethink, bond yields were higher across the board. The dollar index pushed higher, with the euro backing off Thursday’s six-month high.
The Fed’s indications on Wednesday that its policy rate will go over 5% next year still haven’t been fully taken on board by markets, however. The implied terminal rate in futures markets remains under 4.9% on Friday, with almost a half point of rate cuts still pencilled in between there and the end of the year.
Whether markets are fighting the Fed wisely or not remains to be seen.
Elsewhere, the initial exuberant reaction to the dismantling of China’s zero-COVID policy has quickly given way to worries that the world’s second biggest economy may be unprepared for the wave of infections to come.
But China’s stocks did outperform on Friday.
Nearly 200 Chinese companies, including Alibaba and Baidu, heaved a sigh of relief after the U.S. accounting watchdog said it has full access to inspect and investigate firms in China, removing the risk that these companies could be booted off U.S. stock exchanges.
The U.S. accounting watchdog on Thursday said it has full access to inspect and investigate firms in China for the first time ever, removing the risk that around 200 Chinese companies could be kicked off U.S. stock exchanges.
Key developments that may provide direction to U.S. markets later on Friday:
* S&P Global’s flash U.S. business surveys for December
* San Francisco Federal Reserve President Mary Daly speaks
* U.S. corporate earnings: Accenture, Darden Restaurants Graphic: Central banks ramp up fight against inflation, https://www.reuters.com/graphics/NEWZEALAND-ECONOMY/RATES/zdpxddxxnpx/chart.png Graphic: Recession and industrial production, https://www.reuters.com/graphics/USA-ECONOMY/RECESSION/egpbkgdgkvq/chart.png Graphic: Empire State and Philly Fed, https://www.reuters.com/graphics/USA-STOCKS/egvbyyobxpq/empirephilly.png
(By Mike Dolan, editing by Susan Fenton mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)
