MARKET WRAPS
Watch For:
ECB rate decision; BOE rate decision; Germany WPI; France CPI, monthly business survey; trading update from H&M
Opening Call:
Shares may fall at Thursday's open, following signals by the Fed that it would keep rates higher for longer. In Asia, stock benchmarks, oil and gold slipped; while the dollar and Treasury yields pushed higher.
Equities:
European stock futures point to declines at the open on Thursday, after the Federal Reserve signaled rates may have to move even higher than previously thought to rein in inflation.
Investors had widely anticipated the Fed would raise its key policy rate by half a percentage point. What they weren't as sure of ahead of Wednesday's meeting was how much higher Fed officials see interest rates having to go next year.
Those who had been hoping the Fed might be done raising rates relatively soon may have been left disappointed. Fed officials signaled they see interest rates rising to around 5.1% by the end of next year, up from previous estimates in September of around 4.6%.
"We're not out of the woods yet," said Viraj Patel, global macro strategist at Vanda Research. "We're still in a higher-than-normal inflation environment."
Fed Chair Powell and other FOMC members indicated they still want to see concrete progress in getting inflation moving down to their 2% annual target.
"It will take substantially more evidence to give confidence that inflation is on a sustained downward path," said Powell in a post-meeting news conference. "Price pressures remain evident across a broad range of goods and services."
Many investors also remain cautious about the outlook for the economy. They anticipate the run-up in borrowing costs will begin to weigh on corporate profits and consumers in the coming months.
"2023 is the year when you will start to see the impact of all these rate increases," said Seema Shah, chief global strategist at Principal Asset Management. "You can see strains are certainly building up, but the actual economic numbers are pretty resilient. We don't think that will last."
Today, the European Central Bank and Bank of England are expected to match the Fed by raising interest rates 50 basis points.
There will be no BOE press conference this month, but investors will scan the minutes for any comments regarding the expected peak, or "terminal rate" for this cycle.
"We think the minutes could contain overt guidance again to markets that Bank Rate will not need to rise all the way to 4.5%," said Samuel Tombs, chief U.K. economist at Pantheon Economics.
Meanwhile, any update to the ECB's growth forecasts will be watched for.
Berenberg reckons that its new set of quarterly projections may show the ECB becoming "more gloomy again for 2023, with less growth and more inflation than it predicted in September."
The other main issue to keep an eye on will be what the ECB says about quantitative tightening, or the tapering of asset purchases.
Forex:
The dollar strengthened in Asia, as risk aversion roared back after the Fed signaled ongoing increases will be appropriate to combat inflation, Oanda said.
"The Fed's statement and projections was hawkish as the Federal funds rate was seen reaching 5.1%, which was a half-point higher than the September forecast," added Oanda.
"The Fed did not welcome the disinflation trends that have just started to emerge and focused on robust job gains and elevated inflation. Any hopes of a soft landing disappeared as the Fed seems like they are committed to taking rates much higher."
Bonds:
Treasury yields extended gains in Asia, after the Fed signaled overnight that borrowing costs could go above 5% in 2023.
For market participants who thought Fed officials were moving closer to the end of their tightening cycle, the realization was setting in that "they are not quite done yet," said Cindy Beaulieu, chair of the investment policy committee at Conning.
As a result, markets were "backing out some of the euphoria that built up in the last few weeks," when there was growing expectation the central bank would not only stop raising rates soon, but begin easing next year, Beaulieu said.
"I think there was too much enthusiasm from the CPI," said Peter Baden, chief investment officer at Genoa Asset Management, referring to the latest consumer-price index data.
"I don't think two prints of a good CPI number are going to make them change their mind any time soon," said Baden, referring to the Fed and the rate-increasing path it has charted.
Read: U.S. bonds wrap up worst year on record. Here's what may be in store for 2023.
Energy:
Crude oil prices were a tad lower early Thursday, pulling back after rallying on Wednesday.
The gains were driven by the International Energy Agency warning that prices could continue to rise next year, as sanctions on Russia might squeeze energy exports, Saxo said.
The IEA also increased its estimates for global oil demand by 300,000 barrels a day next year, in a likely nod to China's expected reopening, Saxo added.
Metals:
Gold prices fell in Asia after the Fed signaled that it plans to continue raising interest rates next year, Oanda said.
Oanda thinks recent gains in the precious metal were mainly driven by hopes that the U.S. central bank could wrap up its rate increases in February next year, but this no longer seems to be the case after Wednesday's FOMC decision.
"Those comments conveyed the Fed's continued concern about elevated levels of inflation and its desire to raise rates longer and to a higher level than previously forecasted," said Jeff Klearman, portfolio manager at GraniteShares. That increases investor expectations of "continued aggressive Fed monetary policy and pushing gold prices lower."
Still, behind this "lies concerns of a Fed-induced recession, a selloff in equities and, as a result, increased demand for gold as a haven investment," said Klearman.
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Copper prices declined slightly, in line with a broad downturn in base metals, as risk appetite is weakened by the Fed's continued hawkish stance.
But ANZ thinks the metal's supply-demand dynamics look favorable.
"China's reopening is sparking hopes of stronger demand in the not-too-distant future."
Supply concerns are also on the rise as Peru's political protests threaten to disrupt copper production and storage at a major mine.
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Chinese iron-ore futures rose, building on recent gains amid expectations of stronger demand.
Policy support for the property sector and easing Covid-19 curbs in China are helping support prices of ferrous metals, Guotai Junan Futures said.
TODAY'S TOP HEADLINES
Fed Raises Rate by 0.5 Percentage Point, Signals More Increases Likely
WASHINGTON-The Federal Reserve approved an interest-rate increase of 0.5 percentage point and signaled plans to lift rates through the spring, though likely in smaller increments, to combat high inflation.
After the Fed, the ECB and the Bank of England are set to lift interest rates. Here's what to expect.
The European Central Bank and Bank of England are expected on Thursday to match the Federal Reserve by raising interest rates 50 basis points. All are doing so to battle inflation that has at various times this year hit multi-decade highs. But the scenarios they face are all slightly different.
Here's what to expect, and why, from the European monetary guardians.
China's Economic Activity Took Deeper Hit in November Due to Strict Covid-19 Measures
China's economic activity took a deeper hit in November, as strict Covid-19 measures disrupted factory production and weighed on consumption ahead of a sudden loosening of the country's long-running "zero-Covid" policy at the end of the month.
Retail sales, a key gauge of China's domestic consumption, fell 5.9% from a year earlier, compared with a 0.5% on-year decrease in October and below the 3.3% decline expected by polled economists, according to data released Thursday by the National Bureau of Statistics.
China's Central Bank Keeps Key Policy Rates Unchanged
China's central bank kept its key policy interest rates unchanged on Thursday, which may suggest a hold on the nation's benchmark loan rates as the world's second-largest economy faces mounting pressure from Covid-19 flare-ups.
The People's Bank of China kept the interest rate of the one-year medium-term lending facility at 2.75% while injecting 650 billion yuan ($93.52 billion) of liquidity into the financial market via MLF, according to a statement published on its website.
U.S. Oil Prices Under Pressure From Keystone Pipeline's Largest-Ever Leak
A weeklong shutdown of the Keystone oil pipeline is squeezing Gulf Coast refiners, who now have to replace hundreds of thousands of barrels that are no longer flowing through the system.
The 2,700-mile Keystone pipeline shut down Dec. 7 after a rupture in Kansas spilled an estimated 14,000 barrels of crude oil, said its operator TC Energy Corp.-the largest such reported leak in the line's history. The spill is now one of the largest in the U.S. in more than a decade, and the company hasn't disclosed what caused it or said when the pipeline would be fully operational.
Ericsson to Stay Under U.S. Compliance Monitor an Extra Year
Ericsson AB will face an additional year's scrutiny from a U.S.-mandated monitor appointed in connection with a bribery settlement the company reached in late 2019.
The Stockholm-based telecommunications company said Wednesday it had agreed with the U.S. Justice Department and Securities and Exchange Commission to extend the term of its independent compliance monitor until June 2024.
Elon Musk Sold More Than $3.5 Billion Worth of Tesla Shares
Elon Musk sold more than $3.5 billion worth of Tesla Inc. stock this week in his second round of sales since buying Twitter Inc.
Mr. Musk sold nearly 22 million Tesla shares over a three-day period ending Dec. 14, according to a regulatory disclosure made public Wednesday.
(MORE TO FOLLOW) Dow Jones Newswires
12-15-22 0017ET
