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Opening Call:
Shares may edge lower in Europe on Thursday, tracking a weak lead from Wall Street overnight after Fed Chair Jerome Powell said data would determine size of the next rate increase. In Asia, stock benchmarks were mixed; Treasury yields fell; the dollar weakened slightly; while oil was mixed and gold declined.
Equities:
A weak open is seen for European stocks on Thursday, as investors continue to parse Fed Powell's comments.
Mr. Powell said the central bank would keep its options open about future rate increases and that coming economic data would strongly influence the rate decision at the Fed's March 21-22 meeting.
"There's this growing concern about a 'no landing' scenario, effectively where it turns out that the Fed and other central banks have just not done anywhere near enough" to temper economic growth and curb inflation, said John Roe, head of multiasset funds at Legal & General Investment Management.
"I think we will probably see half-point rate hikes and the market is already prepared for that," said Christian Hoffmann, portfolio manager at Thornburg Investment Management.
Deutsche Bank said it thinks that if Friday's February jobs report shows a 300k payrolls gain and the core CPI comes in at 0.4% next week, the market is likely to price in 50bps for the March 22 FOMC meeting.
"In this case, the Fed is likely to deliver on these expectations rather than risk a dovish surprise. Upside surprises, particularly on inflation, would very likely seal the deal for a 50bp hike in March," it said.
Either way, Chairman Powell's messaging points to increasing the upside risks to the investment bank's terminal rate view of 5.6%, it said.
The bank also thinks Powell sounded less optimistic around soft-landing prospects, leading them to believe the Fed has shifted its risk-management assessment by placing a higher probability of a recession being necessary to achieve the 2% inflation objective.
Read: Stock market could 'take it hard' as expectations grow for a 6% fed funds rate
Forex:
The dollar was slightly weaker in Asia, but analysts expect uptrend risk to sustain.
The case for the dollar has strengthened after Powell's testimony in Congress, Capital Economics said.
"The FOMC's renewed hawkishness has been a boon for the greenback," it said, noting that the ICE dollar index has risen nearly 4% since the start of February "as interest rate differentials have shifted back in favour of the US."
"To the extent that the Fed stays hawkish and risk sentiment sours in the coming months, the risks to our dollar forecast are now arguably skewed to the upside," it added.
Bonds:
Treasury yields were broadly lower after Chair Powell wrapped up his two days of congressional testimony, where he renewed his pledge to fight inflation aggressively.
Capital Economics said the 10-year could "end the year higher than our current forecast of 3.25%."
Chair Powell's testimony this week "sent a clear signal to the market that the Fed anticipates having to raise rates more aggressively over the coming meetings," said Deutsche Bank.
"Powell did more than leave the door open to a 50 bp hike in March," the Deutsche Bank team said.
"By explicitly citing the potential to reaccelerate the pace of rate hikes in his prepared remarks, pending the data, the Chair welcomed the market to price substantially higher probabilities for a 50bps hike."
Energy:
Oil futures were mixed early Thursday on interest rate increase concerns.
Although data from the Energy Information Administration showed that U.S. crude-oil inventories declined last week, this failed to offset any concerns that upcoming rate increases could weigh on demand, ANZ analysts said.
This was also magnified by U.S. data showing that labor data remains strong, they added.
"A potentially deep recession in the quarters ahead would clearly be a bad economic environment for oil and the refined products, as consumer demand would be hit hard," said Tyler Richey, co-editor of Sevens Report Research.
Metals:
Gold prices edged lower in Asia, with investors in a wait-and-see mode before the release of the U.S. jobs report on Friday.
"Gold remained anchored after day two of Powell and economic data that supports a tight labor market," Oanda said.
"We know that the Fed's comments have brought life back to the dollar index and this is not so much of good news for the yellow metal," said Naeem Aslam, chief investment officer at Zaye Capital Markets.
Even so, "it seems like gold traders are taking things with a grain of salt," Aslam said.
"This means that the economic data is the most important point for gold traders and weakness in the data could push the Fed to change its narrative on the monetary policy."
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Copper prices fell in Asia amid easing supply-side issues.
Supply risks for copper are dissipating as unrest in Peru, a major copper-producing country, ebbs, said TD Securities.
Given that these supply risks have allowed prices to trade significantly above what would be implied by leading-demand signals, this could open the door to more downside in the near term, it added.
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Chinese iron-ore futures inched higher early Thursday.
"Expectations of further regulatory tightening have eased, and some investors increased their positions and prices rebounded," said Nanhua Futures analysts.
In the short term, iron ore's fundamentals are worsening as steel mills maintain low inventories, but market expectations are still strong, they added.
TODAY'S TOP HEADLINES
Fed's Jerome Powell Says Data Will Determine Size of Next Rate Increase
WASHINGTON-Federal Reserve Chair Jerome Powell said Wednesday officials were keeping their options open over how much to raise interest rates this month after investors interpreted his comments Tuesday to suggest a half-percentage-point increase was likely.
His comments over two days of congressional hearings show how the central bank is contemplating a shift in tactics to keep up with an economy showing surprising strength after a year of rate increases.
China's Inflation Rate Slows to One-Year Low, Casting Doubt on Recovery
HONG KONG-Inflationary pressures in the world's second-largest economy eased more than expected in February after a post-reopening spike, a sign of the limited boost from the lifting of strict "zero-Covid" curbs for domestic demand.
Consumer inflation gained 1% in February compared with a year earlier, slower than the 2.1% increase recorded in January, led by a deceleration in food-price increases, China's National Bureau of Statistics said Thursday. The result also undershot by a wide margin the 1.7% increase anticipated by economists polled by The Wall Street Journal and was the lowest reading since 0.9% gain recorded in February 2022.
U.S., EU to Start Trade Negotiations on Minerals
The U.S. and European Union are moving forward with crafting a trade agreement focused on critical minerals, with President Biden and European Commission President Ursula von der Leyen expected to discuss on Friday the plan to reduce their dependence on China.
As part of the White House meeting on Friday, the U.S. and EU are aiming to announce that they are starting negotiations on the terms of such a deal, according to U.S. and EU officials, though U.S. officials said an announcement would only come after consultation with Congress.
China's Consumer Inflation Eased in February
China's consumer inflation moderated in February to its lowest level in a year, as both food and nonfood prices eased, official data showed Thursday.
The consumer-price index rose 1.0% from a year earlier in February, down from the 2.1% increase in January, said the National Bureau of Statistics. The result undershot the 1.7% increase anticipated by economists polled by The Wall Street Journal.
U.K. Privacy Bill Aims to Reduce the Burden on Business
The U.K. government proposed a data-protection law that it said will save companies from unnecessary compliance paperwork and boost the economy by more than $5 billion over the next decade.
The bill, if approved, would be the U.K.'s first move away from the European Union's General Data Protection Regulation since it left the union in 2020. The British government proposed an earlier draft of the bill last year, and then consulted with business groups and presented a revised version to Parliament on Wednesday. The U.K. has had two changes of government since the bill was drafted.
Russia's Wagner Heralds Advance in Bakhmut as Battle Grinds On in Eastern Ukraine
KYIV, Ukraine-Russia's Wagner paramilitary organization proclaimed control of the eastern district of Bakhmut, after Ukrainian defenders' withdrawal in recent days to positions on the western bank of the river that bisects the city.
The small city of Bakhmut remains the focal point of Russia's offensive, aimed at taking more territory in eastern Ukraine. Wagner forces have led the attack on Bakhmut, pressing back Ukrainian troops inside the largely destroyed city while seeking to surround it and cut off its last supply roads.
Eli Lilly Drug Fails to Prevent Alzheimer's in Study
An experimental drug from Eli Lilly & Co. failed to prevent memory loss in a study of healthy older people with a high risk of developing clinical Alzheimer's disease in one of the first studies aimed at stopping symptoms before they start.
The drug was no better than a placebo over about 4 1/2 years of treatment at slowing patients' decline in areas including memory and the ability to plan and complete tasks, Lilly said Wednesday.
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Expected Major Events for Thursday
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03-09-23 0015ET
