MARKET WRAPS

Watch For:

ECB Interest Rate Announcement; Germany Labour Cost Index; France Job Creation, Foreign Trade, Balance of Payments; updates from Merck KGaA, Sodexo, Darktrace, Currys, Associated British Foods, Ocado, Pandora

Opening Call:

A cautious open is likely in Europe as investors await the latest ECB policy decision. In Asia, most major benchmarks were higher; Treasury yields and the dollar extended losses; oil made modest gains and gold edged lower.

Equities:

European stocks are unlikely to make much progress early Thursday, with futures just in positive territory, as traders position ahead of a European Central Bank policy decision that could see it match the Federal Reserve's three-quarter point hike.

However, global markets have managed to make solid gains, with most Asian benchmarks tracking Wall Street's rally, even as investors continued to consider risks to the global economy.

U.S. stocks finished sharply higher on Wednesday, with all three indexes posting their best day of gains in about a month, as investors assessed remarks by the Fed's Vice Chair Lael Brainard and other Fed officials, while digesting the central bank's latest compilation of economic anecdotes.

Read: Fed on Path for Another 0.75-Point Interest-Rate Lift After Powell's Inflation Pledge

Economic Insight:

Goldman Sachs now sees a more hawkish Fed, and has lifted its forecasts for the Fed funds rate over coming policy meetings.

Its outlook now includes a 75bp rate increase in September versus an earlier forecast for a 50bp hike. It also now expects a further 50bp hike in November, up from 25bp previously.

Goldman Sachs continues to expect a 25bp hike in December, which would take the funds rate to 3.75%-4% by the end of 2022.

Fed officials have sounded hawkish recently and have seemed to imply that progress toward taming inflation hasn't been as uniform or as rapid as they would like, Goldman Sachs said.

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U.K. government proposals to ease the country's energy crisis may face unprecedented market constraints, Evercore ISI said.

While new Prime Minister Liz Truss's reported plans to limit energy-bill hikes would help households and result in headline inflation peaking sooner and lower, it remains unclear how ministers will fund the estimated GBP170 billion cost, Evercore said.

Truss's successful leadership campaign raised monetary and fiscal questions key to market confidence, it added.

"The result was an alarming combination of surging gilt yields and marked sterling weakness--which we think U.K. policymakers should take seriously as a warning regarding potential market constraints on policy, " Evercore said.

"The U.K. could run into constraints that a generation of [developed market] politicians hasn't faced in decades ex-eurozone."

Forex:

The dollar has weakened further overnight, with investors cautiously embracing risk in the Asian session.

"Dollar domination may have one last major rally in it before the market can start placing some long-term bets with some of the European currencies," OANDA said.

"It has been one helluva ride for the dollar--riding flows from the global energy crisis, a widening interest rate differential, and fears of a severe European recession are close to getting fully priced in."

OANDA said the upcoming ECB rate decision will be a "make-or-break moment in FX that will either trigger a bounce towards parity or provide a clear passage towards 0.9750."

Informa thinks the euro "could get a decent little pop" if the ECB does raise rates by 75 basis points as expected but said any strengthening is likely to be temporary, because Europe faces an energy crisis.

"Why would you lend money to the Europeans, or to the Brits, if they're just going to print more money" to subsidize utility bills, Informa asked. It believes the euro and sterling were still "on a downward trajectory."

Bonds:

Treasury yields were mostly lower again, extending Wednesday's declines, as investors increasingly embraced the notion the Fed will reach a terminal rate around 4% by year end and keep it there for a while.

Yields turned lower on Wednesday, shrugging off hawkish talk from a raft of Fed speakers, including Lael Brainard, who said the central bank would keep hiking rates for "as long as it takes" to bring inflation back to its 2% target.

Read: Lael Brainard Says Fed Rate Rises Will Bring Down Inflation

The Fed's Beige Book on Wednesday also showed that the outlook for the U.S. economy over the next year remained "generally weak."

Read: Businesses Expect Economy to Lose More Steam, Fed's Beige Book Says

Other News:

Analysts at Bank of America are worried about the state of the U.S. Treasury market.

"In our view, declining liquidity and resiliency of the Treasury market arguably poses one of the greatest threats to global financial stability today, potentially worse than the housing bubble of 2004-2007/"

They noted that if the Treasury market really hit the wall it could cause even greater disruptions to the economy than those seen in the financial crisis over a decade ago.

Energy:

Crude prices were around 1% higher in Asian trading, steadying somewhat after their recent run of losses.

Prices settled at their lowest since January on Wednesday, pressured by concerns that further interest-rate hikes by the Fed and a drop in China's oil imports suggested a slowdown in energy demand.

Prices started to unravel "after The Wall Street Journal reported the Fed was more than likely is going to raise interest rates by 75 basis points at the next meeting," The Price Futures Group said.

"There seems to be a lot of liquidation on fears that the economy is going to take a turn for the worse." There are also "whisper numbers that we should see an increase in oil supplies in this week's inventory report after the big release from the Strategic Petroleum Reserve."

Other News:

The API reported U.S. inventories of crude surprisingly climbed by 3.6 million barrels last week, while gasoline supplies dropped by 836,000 barrels.

The results, bearish for crude, were released ahead of official inventory data from the EIA. Average forecasts in a WSJ survey indicate the EIA report will show crude inventories rose by 300,000 barrels from the previous week and that gasoline supplies decreased by 1.4 million barrels.

Metals:

Gold futures edged slightly lower, retrenching a touch after prices marked their highest finish in more than a week on Wednesday.

Kinesis Money said it was "hard to see how gold can make any gains given such a hawkish [economic] environment, yet there clearly remains some underlying support for the metal that is at least enabling it to hold around the key threshold of $1,700."

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Copper prices made modest gains, with optimism rising, as the base metal enters its peak demand season, Huatai Futures said.

Many refineries in China may halt production for maintenance this month, which could limit supplies and support prices. However, the upside may be limited by growing Covid-19 infections and tightening pandemic curbs in China, which could become a major swing factor in the coming months, Huatai Futures said.


TODAY'S TOP HEADLINES

Businesses Expect Economy to Lose More Steam, Fed's Beige Book Says

U.S. businesses in the late summer expected continued weak economic growth as consumers and businesses face high inflation, a tight labor market and economic uncertainty, the Federal Reserve said in a report.

The Fed's 12 regional reserve-bank districts said their business contacts noted "expectations for further softening of demand over the next six to twelve months," according to the central bank's latest compilation of economic anecdotes from around the country, known as the Beige Book.


Japan's Economy Grew Faster Than Initially Estimated in Second Quarter

TOKYO-Japan's economy expanded at a faster pace than initially estimated in the second quarter on stronger spending by companies and households.

The world's third-largest economy after the U.S. and China expanded 3.5% on an annualized basis, revised government data showed Thursday.


RBA Looks Set to Slow Pace of Rate Hikes But Peak is Unclear

SYDNEY-The Reserve Bank of Australia looks set to slow the pace at which it is raising interest rates, but says that it is unsure where the official cash rate will peak given global uncertainties and the significant task of reining in the biggest inflation problem in a generation.

RBA Gov. Philip Lowe told a luncheon of economists on Thursday that the central bank is highly conscious of the fact that it has been raising interest rates at speed since May, and that the process of tightening policy works with lags.


Fed on Path for Another 0.75-Point Interest-Rate Lift After Powell's Inflation Pledge

The Federal Reserve appears to be on a path to raise interest rates by another 0.75 percentage point this month in the wake of Chairman Jerome Powell's public pledge to reduce inflation even if it increases unemployment.

Fed officials have done little to push back against market expectations of a third consecutive 0.75-point rate rise in recent public statements and interviews ahead of their Sept. 20-21 policy meeting.


Crypto Crash Gives U.S. Bank Regulators 'Breathing Space,' Official Says

A rush to put out new crypto regulatory guidance has slowed down as a drop in asset values has made the task less urgent, a senior banking regulator said.

Federal agencies have in recent months seen a less pressing need to publish planned interagency guidance on how banks should treat digital assets, Michael Hsu, acting comptroller of the currency, said Wednesday at a banking industry conference in New York.


Europe Considers Windfall Levies on Electricity Producers

BRUSSELS-European Union officials are weighing plans to redistribute some electricity producers' windfall revenues to households and companies reeling under the continent's high energy prices.

(MORE TO FOLLOW) Dow Jones Newswires

09-08-22 0032ET