MARKET WRAPS
Watch For:
EU New Passenger Car Registrations, Labour Cost Index; UK interest rate decision, BOE MPC meeting minutes, Italy CPI; Eurogroup meeting of eurozone finance ministers; Bank of Japan Monetary Policy Meeting; updates from Delivery Hero, Saint-Gobain, IAG, Iberdrola, Ferrari, Halma, Evraz, Whitbread, Petrofac, Informa
Opening Call:
Europe is poised for a positive open, with stocks seen adding to Wednesday's gains after the Dow and S&P 500 snapped a 5-day skid following the Fed rate hike. In Asia, shares, oil and gold were higher, while the dollar and Treasury yields continued to pull back.
Equities:
European shares should extend gains Thursday, buoyed by Wall Street's post-Fed rally.
U.S. stocks soared after the Federal Reserve approved its biggest interest-rate increase since 1994 but suggested moves of that scale likely wouldn't become common.
Jerome Powell said Wednesday's move was "an unusually large one." He added that he expected either a 0.50 percentage point or 0.75 percentage point increase at the Fed's July meeting.
"The Fed is pretty clear that it's trying to engineer a soft landing, and the market is buying into the idea that early, aggressive action by the Fed will give policy makers flexibility later this year and into early next year," said Tom Garretson, a senior portfolio strategist at RBC Wealth Management.
In the U.K., the Bank of England is set for another increase in interest rates on Thursday, the fifth since December, but policymakers look increasingly divided about the current pace of rate hikes.
Read more here.
Post-Fed Reactions
Barclays said the Fed is likely to slow down to a 50-basis point rate increase next month.
"Households are finally reacting to high inflation and negative real wage growth," Barclays said, pointing to its credit card data showing a deceleration in the pace of spending in the last month or so, as well as May's retail sales, which came in below expectations.
Housing and wages also show signs of weakness that would support a softer hike, it said.
---
Spartan's Peter Cardillo said the Fed's 75-basis point rate hike avoids market volatility and should be able to keep inflation from going higher.
"It boils down to one thing, they are going to raise rates at a faster pace. This tough talk is probably going to calm the markets, at least the bond market, in the intermediate future."
Cardillo expects higher prices to dent consumption, helping the Fed to fight inflation. "You have a Fed that is going to send us in a recession. That itself will drastically cut consumer spending and weaken prices."
Economic Insight:
Capital Economics said the global economy may have contracted slightly in the second quarter, "which would be the weakest outcome in recent history aside from the height of the pandemic and the Global Financial Crisis."
"Part of the weakness reflects a likely slump in Russian GDP, but we also anticipate quarterly declines in the euro-zone and U.K. while the Chinese economy will have contracted amid ongoing virus restrictions."
The U.S., in contrast, seems to have rebounded, growing 3.6% on a quarterly annualized basis, or 0.9% versus the first quarter, Capital Economics estimated.
Forex:
The dollar lost further ground as risk-on sentiment lifted Asian stock markets.
Bank of America said the Fed took the "free option" of a 75bp rate increase already mostly priced into markets. "The one discordant note: they still have an implausibly soft landing, in our view." BofA is skeptical the Fed will be able to cut rates in 2024.
The yen was also weaker. Ahead of the BOJ's monetary policy decision on Friday, there are growing calls for the central bank to widen the yield-curve-control band to bring a 0.5% yield into play, said ING economists. Such a move, or consideration of it, could give a short-term boost to the yen, they said.
---
Weak economic data has complicated the picture for the Bank of England's monetary-policy meeting Thursday but policymakers' hands could be forced in the longer term by the pound's relative weakness against the dollar fuelling U.K. inflation.
Read more here.
Bonds:
Treasury yields, including the 2-year note yield, continued to pull back Thursday.
The 2-year Treasury yield had its biggest one-day drop since February 2020 on Wednesday, steepening the curve, after Fed projections pointed to lower interest rates in 2024.
But recession risks remain, said IndexIQ's CIO Salvatore Bruno. "To come down from 8% inflation and put the bird on the ground at 2% without crashing it is difficult. The odds against [the Fed] doing it are pretty high."
Bruno said weaker retail sales last month may be an indication that higher rates are already having the desired effect on consumption, and upcoming housing data should shed more light on consumer behavior.
Energy:
Oil futures edged higher in Asia in a possible technical rebound after they settled at their lowest in two weeks on Wednesday as U.S. supplies unexpectedly climbed a second week and the Fed hiked rates.
Joe Biden on Wednesday wrote letters to U.S. oil refiners, calling on them to produce more gasoline and diesel and saying their profits have tripled during a time of war between Russia and Ukraine as Americans struggle with record high prices at the pump.
Volatility in the oil market appears to be on the rise again as the economic outlook darkens, said Citi Research analysts, citing the IEA's latest "bearish" report.
Metals:
Gold futures gained on hopes that Treasury yields may peak out.
Some traders are seeing "light at the end of the Fed rate hiking tunnel, " said OANDA'S Edward Moya. While the Fed may deliver one more 75 basis point rate increase, traders are doubting there'll be a steady stream of super-sized hikes, Moya added.
With the latest Fed decision out of the way, the focus for gold traders and investors will mostly remain the same--"closely watching inflation and economic data to see if the actions taken by the Fed are providing sought-after results, or if adjustments still need to be made," said Jeff Klearman, Portfolio Manager at GraniteShares.
Peter Spina, president and chief executive officer at GoldSeek.com, said gold has "very limited downside" from here, and continues to "build a strong floor around these prices to keep pushing higher towards $2,000."
---
Aluminum rose close to 2%, helped by Wednesday's upbeat Chinese industrial output data.
Government data showed that primary aluminum production in China rose for a second consecutive month in May to reach an all-time high, said ING strategists.
Aluminum production jumped 3.1% on year and 1.8% on month to 3.4 million tons, as power constraints eased and aluminum smelters restarted operations together with the addition of new production capacity, the strategists said.
---
Fitch said steel prices could trend higher as Chinese infrastructure demand kicks in from the second half onward.
"Demand recovery in China appears to be outpacing supply recovery as Covid-19 restrictions are eased."
Dwindling exports from Ukraine due to the Russian invasion as well as an unwillingness from some market participants to import Russian-made steel are also supporting prices of the construction material, Fitch said.
TODAY'S TOP HEADLINES
Fed Raises Rates by 0.75 Percentage Point, Largest Increase Since 1994
The Federal Reserve approved the largest interest-rate increase since 1994 and signaled it would continue lifting rates this year at the most rapid pace in decades to fight inflation that is running at a 40-year high.
Officials agreed to a 0.75-percentage-point rate rise at their two-day policy meeting that concluded Wednesday, which will increase the Fed's benchmark federal-funds rate to a range between 1.5% and 1.75%.
GM, Ford CFOs Say They Are Preparing for Economic Slowdown
The chief financial officers for two of the U.S.'s largest car companies-General Motors Co. and Ford Motor Co.-say consumer demand remains strong, but they are watching for signs of a U.S. recession.
At a Deutsche Bank conference Wednesday, Ford CFO John Lawler said an economic downturn is a possibility and that the auto maker was trying to assess the impact of inflation and rising gasoline prices on the broader economy. On Wednesday, the Federal Reserve approved a 0.75-percentage-point rate increase, the largest since 1994.
Rising Interest Rates Could Cool Industrial Investment, Executives Say
Rising interest rates could pinch freight carriers and put industrial real-estate transactions on pause, executives say, but tighter policy might help if it succeeds in slowing the inflation that is driving up the cost of projects.
"If there's any one sector that really needs inflation to get under better control, it is the industrial sector," said Kevin Thorpe, chief economist at real-estate services firm Cushman & Wakefield.
Investors See Higher Defaults Ahead as Interest Rates, Inflation Take a Toll
Debt investors are betting that the Federal Reserve's latest rate hike is a prelude to a downturn for some U.S. companies as rising borrowing costs are likely to put a damper on consumer spending and raise expenses for business.
The Federal Reserve on Wednesday announced a 0.75-percentage-point raise of the federal-funds rate, the central bank's largest rate hike since 1994. Fed projections released Wednesday also showed that the policy makers expect to raise rates further as the year progresses.
China's New-Home Prices Declined Further in May
BEIJING-The decline in China's new-home prices widened in May as challenges persisted for the country's property market, even as local governments' and banks' supportive measures for the sector took effect to counter plummeting home sales in the past year.
(MORE TO FOLLOW) Dow Jones Newswires
06-16-22 0026ET
