LONDON, March 9 (Reuters) – World markets were in a rare lull on Thursday ahead of the week-end US jobs data that could easily spark more cross-asset storms.
European equity markets started marginally lower although there was little movement from the dollar/FRX or the bond markets, where recession warnings continued to tighten. /US
US Federal Reserve chief Jerome Powell had stuck to his message of higher and possibly faster rate hikes at a hearing on Wednesday, but also stressed that the decision would depend on the strength of incoming data.
It means traders will look even more closely at the US payroll numbers on Friday and then at the US inflation numbers that follow on Tuesday.
Financial markets are now pricing in a near 80% probability of a 50 basis point rate hike at the Fed’s meeting in March, up from about 30% at the start of the week. There is also a growing expectation that the US central bank could raise interest rates to 6%.
“Our core view is that 5.5% will be enough, but they (Fed) should stay there longer than the market expects.” said Iain Cunningham, Co-Head of Multi-Asset Growth and Co-Portfolio Manager of the Ninety One Global Macro Allocation Fund.
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“A recession in the US is our central scenario,” he said, though he added that the fund was still heavily long on the dollar, especially against currencies like the Canadian dollar and British pound.
The US dollar index, which measures the value of the greenback against a basket of major counterparts, hovered close to a quarterly high at 105.57. However, it lost 0.4% against the Japanese yen at 136.78 per dollar.
Japan’s lower house on Thursday approved the government’s candidate Kazuo Ueda as the new governor of the central bank.
However, the Bank of Japan is expected to stick to what it calls Yield Curve Control and extremely low interest rates at its current chief’s last meeting on Friday.
Ten-year government bond yields hit the BOJ’s policy ceiling of 0.5% again on Thursday.
The greenback also performed well against the Canadian currency at $1.3803 Canadian dollars, its highest level in nearly four months, thanks to an easing Bank of Canada, which left its interest rates unchanged on Wednesday.
The Chinese yuan, meanwhile, weakened towards key psychological levels of 7 per dollar following the lowest annual consumer price inflation rates in a year, casting doubts on the strength of the economic recovery.
BACK TO THE 80S
Benchmark markets for government bonds remain the main lightning rod for both interest rate expectations and the degree of pain the sharp rises are likely to inflict on the global economy.
Two-year government bond yields remained close to a 15-year high at 5.04%, while the 10-year benchmark held steady at 3.9953%.
In particular, the gap between shorter-term two- and longer-dated ten-year government bond yields reached negative 108.2 basis points. That was the most extreme inversion since 1981. Inversions are considered reliable indicators of recession.
Also in Europe, the German 2s10s curve was at its most inverted point since 1992, with German 2-year rates at a post-2007 high of 3.35% and 10-year rates at 2.68%.
“Powell admitted that March’s decision is data-dependent,” said Thierry Wizman, Macquarie’s global FX and interest rate strategist. “The question we face, therefore, is whether the economic acceleration in January was a blip or a trend.”
The pre-payroll warning meant that both S&P 500 futures and Nasdaq futures were 0.3% in the red. Indexes also struggled on Wednesday after private payrolls beat consensus estimates and demand for home loans increased despite higher mortgage rates.
Forecasts for Friday’s key data are a modest increase in payrolls of 205,000 after January’s increase of 517,000 led markets to revise monetary tightening expectations.
In Asia, MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) is down 0.6% overnight, after falling 1.4% in the previous session. Japan’s Nikkei (.N225), on the other hand, rose 0.6%.
Commodity prices tended to be lower, with Brent crude falling to $82.45 a barrel, US crude falling to $76.39 a barrel and global growth sensitive metal copper falling 1%. Gold was slightly higher at $1817 an ounce.
Additional reporting by Stella Qiu in Sydney and Joice Alves in London; Edited by Angus MacSwan
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