S&P futures are modestly in the green, paying no attention to today's historical "Ides of March" cautionary date as we continue higher ahead of today's quad witching day, and after the latest hot PPI data which weakened the case for imminent Federal Reserve rate cuts. As of 8:15am, S&P futures were up 0.1%, while Nasdaq futures gained 0.2% with Goldman's Michael Nocerino writing that the market bid this morning follows a heavier tape yesterday with PPI coming in stronger than expected (boosting PCE est for next week + pushing market pricing of rate cuts in June to 54% from 68%).
Europe's Estoxx 50 gained 0.5% in London session with outperformance in banks, healthcare energy, telecom but weakness from the luxury sector (Brunello Cuccinelli earnings) and tech underperforming; earlier Asia was mixed/mostly lower. Elsewhere, 10Y yields are unchanged around 4.29%, WTI futures are lower by 0.5%, unwinding some of this week’s aggressive rally. The dollar is flat while the yen dropped even after Japan’s largest union group announced stronger-than-expected annual wage deals, keeping the prospect of policy tightening from the BOJ next week on the table. USDJPY rises 0.3% to ~148.70 as a clueless Mrs Watanabe remains firmly in control. Bitcoin tumbled overnight after hitting a new record high above $73,000 just hours earlier. Headlines fairly quiet, with a lot of market attention pulled forward to next week's NVDA AI developer conference, a potential hike from the BoJ, and Wednesday's FOMC meeting.
Doubts about whether policymakers can take their foot off the monetary brake are creeping into otherwise bullish markets that have taken stock indexes to fresh highs. European stocks are on track for their eighth consecutive week of gains — the longest winning streak since 2018 — lifted by conviction that euro-area interest rates will start to fall in the coming months.
Equities could face additional volatility with Friday’s multiple options expiry, known as a triple witching. Markets are now especially vulnerable to any setback, either in optimistic economic outlooks or bets on monetary easing, according to Guy Miller, chief market strategist at Zurich Insurance Company Ltd.
“I think we’re getting to a more challenging period in markets because we’ve had all of the good news,” Miller said. “There isn’t much risk premium priced into risk assets and therefore if any of the following happen, namely if we don’t have a soft landing or no landing or if we don’t have a rate cut this year, that’s going to becomes a problem for the market.”
European stocks edge higher, with the Stoxx 600 up 0.2% and on track for their eighth consecutive week of gains — the longest winning streak since 2018 — lifted by conviction that euro-area interest rates will start to fall in the coming months. Telecom and auto shares are the best performers while among individual movers, Swisscom gains as the operator says it agrees to buy Vodafone Italia for €8 billion. Here are some of the biggest movers on Friday:
Earlier in the session, Asian stocks declined, with Chinese and Korean stocks leading a broad regional selloff, after the latest US data was seen as discouraging the Federal Reserve from cutting interest rates. The MSCI Asia Pacific Index fell as much as 0.9%, taking its loss this week to 1.7%. That’s after seven straight weekly gains, which marked the longest winning run since December 2020. The technology sector was the biggest drag on the regional benchmark on Friday, led by TSMC as analysts warned the stock’s rally had gone too far, too fast.
A measure of Chinese shares listed in Hong Kong slid more than 2% to be Asia’s worst performer as the nation’s central bank drained cash from the financial system with a medium-term liquidity tool for the first time since November 2022. Still, the gauge is up about 15% from this year’s low in January thanks to the government’s measures to bolster the economy and markets.
“This is a healthy correction,” said Kerry Goh, chief investment officer at Kamet Capital Partners Pte. “I don’t think China is short on liquidity, but confidence to spend or invest. The draining of liquidity is probably one off to balance the amount of cash sitting in the system.”
In FX, the dollar extended gains for a second day, on course for the first weekly advance in four; G-10 currency traded mixed with Swiss franc and euro leading gains while commodity currencies underperformed. the yen is lower even after Japan’s largest union group announced stronger-than-expected annual wage deals, keeping the prospect of some form of policy tightening from the BOJ next week on the table. USD/JPY rises 0.3% to ~148.70. The kiwi is still the weakest of the G-10 currencies, falling 0.6% versus the greenback after some downbeat remarks from the finance minister.
In rates, treasuries traded in a narrow range with yields slightly cheaper across the curve and gains led by the long-end, unwinding a portion of Thursday’s aggressive selloff. US yields richer by up to 2bp across the long-end of the curve with both 2s10s and 5s30s spreads flatter by around 1bp on the day; 10-year yields around 4.28% remain near top of Thursday’s session range and outperforming bunds and gilts both by 2bp in the sector. Bunds lag, after French inflation is revised higher and money markets trim pricing for potential ECB easing for a fourth day. The US session is set to focus on data, which includes industrial production and University of Michigan sentiment.
In commodities, oil prices decline, with WTI falling 0.6% to trade near $80.80 but near a four-month high after the IEA forecast a supply deficit through 2024, changing its earlier projection of a surplus, on the premise OPEC+ maintains production cuts. Copper, typically seen as a bellwether of the global economy, surged to $9,000 a ton, as bets that a pick-up in global manufacturing activity will push up demand for industrial commodities. Spot gold rises 0.4%. Bitcoin drops ~4%.
Bitcoin tumbled as much as 6% off its price, falling to as low as $65.5K, before paring the move back to around $68K.
Looking at today's calendar, the US data calendar includes March Empire manufacturing, February import/export prices (8:30am), industrial production, capacity utilization (9:15am) and March University of Michigan sentiment (10am). There are no scheduled Fed speakers due before the March 20 policy decision; we’ll hear from the ECB’s Panetta, Vujcic and Lane.
Market Snapshot
Top Overnight News
Earnings and company news
A more detailed look at global markets courtesy of Newsquawk
APAC stocks declined amid data-related headwinds from the US including hot PPI and weak Retail Sales. ASX 200 was dragged lower by underperformance in mining-related industries after iron ore resumed its slide. Nikkei 225 retreated amid cautiousness ahead of the RENGO wage announcement and its potential ramifications on BoJ policy as reports had suggested strong wage hikes could be the deciding factor on whether the BoJ hikes at next week's crucial meeting. Hang Seng and Shanghai Comp. were negative with heavy losses in tech and property sectors in Hong Kong where the Hang Seng Mainland Properties Index fell more than 3% after a steeper decline in Chinese New Home Prices, while the mainland was only marginally pressured after the PBoC kept its 1-year MLF rate unchanged and opted to not fully roll over the maturing amount.
Top Asian News
European bourses, Stoxx600 (+0.2%) began the session around the unchanged mark, before sentiment improved and edging into the green. European sectors are mixed; Telcoms takes the top spot, propped up by Vodafone (+4.5%) and Swisscom (+2.5%), whilst Real Estate is hampered by post-earnings losses in Vonovia (-6.1%). US equity futures (ES +0.1%, NQ +0.1%, RTY +0.3%) are modestly firmer with price action mimicking that seen in Europe; Adobe (-11.6% pre-market) is weaker after providing soft guidance.
Top European News
FX
Fixed Income
Fixed Income
Japan wage negotiations and upcoming rate hike
Geopolitics
US Event Calendar
DB's Jim Reid concludes the overnight wrap
The last 24 hours have seen a dramatic bond sell-off, with 10yr Treasury yields (+10.0bps) up to 4.29% as concerns mounted about stubborn inflation. The main driver was a strong US PPI report, which showed that producer prices were rising faster than expected in February. But alongside that, oil prices closed at their highest level since November, which added to fears that inflation was still gathering momentum. And on top of that, there was growing anticipation that the Bank of Japan would end their negative interest rate policy at next week’s meeting, which added to the upward pressure on global yields.
For markets, the big question is what this means for rate cuts. Up to now, futures had been focused on June as the most likely timing for the Fed’s first cut. But this week’s releases have led to growing doubts about that. For example, futures are now pricing in roughly a one-in-three likelihood that the Fed won’t cut at all by June. And for 2024 as a whole, just 76bps of cuts are priced in by the December meeting, which is the fewest so far this year. That’s a big turnaround from the start of the year, when 158bps of cuts were expected by December, and the first cut was fully priced in by March. So we’re seeing yet another hawkish repricing, which echoes several other points over the last couple of years when markets have priced in a dovish pivot before progressively dialling that back. Indeed, this pattern of pricing a dovish pivot has happened at least 7 times now in this cycle (we counted them before here), and on the previous 6 it was followed by even more hawkish outcomes.
That sets the stage for a very important week of central bank meetings ahead, with decisions from both the Bank of Japan and the Federal Reserve next week. Notably at the Bank of Japan, there’s been growing anticipation that they’re about to end their negative interest rate policy, and investors are pricing in a 61% likelihood of a shift. That’s what DB’s economist is expecting in his own preview (link here), but we should get some important information today, as we’ll get the outcome of wage negotiations from Rengo, the country’s largest union group. Meanwhile at the Fed, the big question next week is what they’ll signal in their new dot plot, and whether the median dot still points towards three cuts for 2024, as happened in December.
In terms of the details of that PPI release yesterday, the main story was that headline PPI came in at +0.6% (vs. +0.3% expected), which pushed the year-on-year measure up to +1.6% (vs. +1.2% expected). Moreover, the measure excluding food, energy and trade services was up +0.4% (vs. +0.3% expected). So the release echoed the upside surprise in Tuesday’s CPI print, and led to growing concern that inflation was getting stuck above target levels. At the same time, that inflation narrative got further momentum from the latest uptick in oil prices, with Brent Crude (+1.65%) closing at $85.42/bbl, the highest since early November. The latest oil price rise was supported by the latest IEA report, which now foresees the oil market staying in deficit through 2024.
Admittedly, yesterday’s data wasn’t entirely hawkish, with US retail sales disappointing in February. But the weakness only served to dampen risk appetite further. Headline retail sales were only up by +0.6% in February (vs. +0.8% expected) with the previous month revised down to show a larger -1.1% decline. And the retail control group was flat in February (vs. +0.4% exp.) after falling by -0.3% in January. This means the 3-month change in retail control has turned negative for the first time since last April.
Nevertheless, it was the prospect of faster inflation and fewer rate cuts that dominated the rates reaction and led to a major global sell-off for sovereign bonds. In the US, that meant Treasuries lost ground for a 4th consecutive day, with yields on 2yr Treasuries (+5.9bps) up to 4.69%, whilst yields on 10yr Treasuries (+10.0bps) rose to 4.29%. And there was evidence that investors were anticipating faster inflation, with the US 2yr inflation swap (+3.7bps) rising to 2.47%, its highest level since October. Meanwhile in Europe, yields on 10yr bunds (+5.9bps), OATs (+7.1bps) and BTPs (+10.5bps) all moved higher as well. And overnight there’s only been a slight decline in yields, with those on 10yr Treasuries down -1.0bps to 4.28%.
For equities, it was also a difficult session yesterday. The S&P 500 was down -0.29%, but the decline was very broad with 79% of constituents down on the day and the equal-weighted version of the index (-0.95%) saw its worst daily performance in the past month. The decline was led by both interest-sensitive sectors (with real estate down -1.61% and utilities -0.81%) and consumer-oriented ones (consumer staples -0.78%). The small cap Russell 2000 was down -1.96% while the NASDAQ (-0.30%) and Magnificent 7 (-0.22%) saw moderate losses. It was another day of wide variation within the Mag 7, with large declines for Tesla (-4.12%) and Nvidia (-3.44%) but sizeable gains for Microsoft (+2.44%) and Alphabet (+2.37%). Back in Europe, the STOXX 600 (-0.18%) fell back from its all-time high the previous day, but the CAC 40 (+0.29%) outperformed to close at a new record.
Overnight in Asia, those equity losses have continued across the region, with declines for the Hang Seng (-2.18%), the KOSPI (-1.63%), the CSI 300 (-0.57%), the Nikkei (-0.42%) and the Shanghai Comp (-0.20%). In China, that comes as the PBoC have left their 1yr medium-term lending facility rate at 2.5%. Moreover, they withdrew a net 94 billion yuan of cash from the banking system. Looking forward, US equity futures are also pointing to further weakness, with those on the S&P 500 down -0.08%.
To the day ahead now, and data releases include US industrial production and capacity utilisation for February, along with the preliminary University of Michigan consumer sentiment index for march, and the Empire State manufacturing survey for March. Alongside that, we’ll get Italian retail sales for January. Meanwhile from central banks, we’ll hear from the ECB’s Panetta, Vujcic and Lane.