Morning Bid Americas: Dollar surges as European, Japan hawks coo

AngioDynamics

03/10/2024 11:02

A look at the day ahead in U.S. and global markets from Mike
Dolan
The U.S. dollar  .DXY  is on course for its best week in six
months, surging anew on Thursday against the yen, sterling, euro
and Swiss franc as central banks around the world appear set to
out-dove the Federal Reserve.
    Partly spurred earlier this week by a "safety bid"
surrounding Middle East tensions, dollar gains have really
mounted as speculation of another round of interest rate cuts in
Europe were twinned with official hesitation at further monetary
tightening in Japan - with inflation subsiding everywhere.
    And with U.S. labor market signals continuing to show brisk
job creation, the relative rates picture seems to have shifted
back in favor of the greenback - whose 1.5% appreciation this
week is the biggest since April.
    The Bank of England, a recent holdout in the rush to peg
back interest rates, was the latest to turn decidedly dovish as
BoE boss Andrew Bailey told the Guardian newspaper the central
bank could become "a bit more activist" and "a bit more
aggressive" in its approach to lowering rates.
    With a second rate cut of year now fully priced for the
BoE's meeting next month, the pound  GBP=  dropped more than a
cent on Thursday to three-week lows just above $1.31. 
    The tone has shifted across the European continent too. 
    Hawkish European Central Bank board member Isabel Schnabel
underscored forecasts for another ECB rate cut in a fortnight's
time by saying on Wednesday: "A sustainable fall of inflation
back to our 2% target in a timely manner is becoming more
likely."
    And her ECB colleague Mario Centeno went one further: "Now
we face a new risk: undershooting target inflation, which could
stifle economic growth," he said. 
    European September business surveys on Thursday confirmed
the bloc's private sector activity slipped back into contraction
last month.
    A rapid disinflation scenario was obvious again in
Switzerland, which saw monthly deflation on 0.3% last month that
dragged annual inflation to as low as 0.8% - well below forecast
and increasing pressure on the Swiss National Bank to ease again
even with rate there back as low as 1% already.
    In his first public appearance since taking charge, new
chairman Martin Schlegel on Tuesday also said the SNB was not
ruling out taking interest rates into negative territory.
    Over in Asia, it appears the Bank of Japan's moves to
'normalize' its ultra-low policy rates have also been stopped in
their tracks and the yen  JPY=  fell to its weakest in six weeks
through 147 per dollar. 
    Japanese Prime Minister Shigeru Ishiba completed a backflip
from perceived monetary hawk to dove on Wednesday by saying: "I
do not believe that we are in an environment that would require
us to raise interest rates further."
    BOJ policymaker Asahi Noguchi, who dissented against a rate
hike in July, doubled down on Thursday by saying the central
bank must be patient in normalizing policy.
    The sudden concern around the world about ebbing inflation
is partly down to plummeting oil prices  CLc1  - which despite a
modest pop on the Israel/Iran standoff this week are still
clocking annual losses of more than 20% and have been for more
than a month. 
    An OPEC+ meeting on Wednesday did little to offset that,
with ministers keeping policy unchanged and including a plan to
start raising output from December. And the latest week's data
showed U.S. crude oil and gasoline inventories rising. 
    By contrast with Europe, Fed easing hopes cooled somewhat as
this week's stream of employment statistics underlined the 'soft
landing' thesis there, taking some more heat out of rate cut
bets.
    Private payrolls increased by 143,000 jobs last month after
rising by an upwardly revised 103,000 in August, the ADP
National Employment Report showed on Wednesday. September
updates on layoffs and weekly jobless claims are due later on
Thursday alongside updated service sector surveys for last
month.
    Richmond Federal Reserve President Thomas Barkin told
Reuters on Wednesday he was still concerned about the "last
mile" in getting inflation back to target. "I'm more concerned
about inflation than I am about the labor market," he said about
the outlook through next year.
    The upshot was futures pricing for Fed rate cuts through the
end of this year ebbing back below 70 basis points and Treasury
yields nudging higher, with the 10-year nosing back above 3.80%.
    Stock markets around the world were more mixed, with
European stocks  .STOXXE  in the red on Thursday and Hong Kong
 .HSI  stocks taking their first step back since China's
frenetic stimulus measures were unveiled last week.
    Japan's Nikkei  .N225  outperformed with gains of almost 2%
on the BOJ soundings and weakening yen.
    With Wall St stocks  .SPX  flat on Wednesday, held back by
disappointing deliveries readings from automaker Tesla  TSLA.O ,
index futures were slightly in the red ahead of Thursday's open.
    Emboldened by "soft landing" hopes, U.S. high-yield junk
bond yield spreads over Treasuries have fallen close to their
lowest for the year and are testing historic lows on an
options-adjusted basis.  
    With the third quarter earnings season about to unfold and
parsing a final quarter of political nerves from the Middle East
to the U.S. election, the VIX  .VIX  volatility gauge is above
historical averages and hovering just shy of 20.
     
    Key developments that should provide more direction to U.S.
markets later on Thursday:
* US September Challenger layoffs, weekly jobless claims,
September service sector surveys from ISM and S&P Global, August
factory goods orders 
* Atlanta Federal Reserve President Raphael Bostic and 
Minneapolis Fed President Neel Kashkari both speak  
* US corporate earnings: Constellation Brands, AngioDynamics
* US Treasury auctions 4-week bills


    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Dollar on course for best week since April    https://tmsnrt.rs/3XIWsVO
US ADP private sector payroll growth picks up     https://reut.rs/3ZMxUOa
Oil refinery sites in Iran    https://reut.rs/3ZN17sk
Tesla deliveries grow after two dour quarters    https://reut.rs/47Ob0ba
Europe’s auto giants’ shrinking valuations    https://reut.rs/4eDTTuQ
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (By Mike Dolan, editing by Mark Heinrich
mike.dolan@thomsonreuters.com)
 ((mike.dolan@thomsonreuters.com  https://reut.rs/3xFdLhlhomsonreuters.com
 mailto:mike.dolan@thomsonreuters.com; +44 207 542 8488; Reuters
Messaging: rm://mike.dolan.reuters.com@thomsonreuters.net/))