What matters in U.S. and global markets today |
By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets |
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As the Federal Reserve takes a hawkish turn in the face of another Wall Street swoon, the European Central Bank appears set to ease borrowing rates again - or at least that's what markets expect. I'll get into all the details below and then explain why the bond market doesn't appear to be too worried about U.S. long-term inflation. The answer may not be all good news. I'll be off tomorrow, as the U.S. stock market will be closed for the Good Friday holiday, and then I'm on holiday next week. But 'Morning Bid' will be back in your inbox on Tuesday, with all the markets coverage you're looking for from my Reuters colleagues. I'd love to hear from you, so please reach out to me at mike.dolan@thomsonreuters.com. |
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ECB set to ease as Fed delivers hawkish twist |
The final trading day of a holiday-shortened week for U.S. markets is seeing stock futures reclaim some of Wednesday's steep tech-led losses. An earnings beat from Taiwan's TSMC, and its unchanged revenue growth outlook, helped steady the chip ship, which had wobbled again yesterday as new licensing fees linked to the U.S.-China trade spat sank Nvidia stock by almost 7%.
But if investors expected the Fed to bail the market out, Chair Jay Powell made it clear that's not happening any time soon.
Speaking in Chicago late yesterday, Powell seemed to suggest that the central bank would be on hold for an extended period to tamp down inflation expectations.
"Tariffs are highly likely to generate at least a temporary rise in inflation," he said. "The inflationary effects could also be more persistent."
While Powell's resolve to hold the line did little to offset a 2%-plus drop in the S&P 500, Treasury yields did fall back as market-based measures of long-term inflation expectations remain anchored close to 2%.
Meanwhile, the Bank of Canada also surprised some by resisting another rate cut on Wednesday, perhaps mindful of the upcoming Canadian election. With this North American rate stasis in the background, the ECB is now on deck.
Money markets are priced for another quarter point ECB rate cut today to 2.25%, as the euro is close to a three-year high against the ailing dollar amid heightened trade war uncertainty and the euro's real effective exchange rate index is at a 10-year high.
The euro ebbed a touch ahead of the decision, German bund yields nudged higher and euro stock benchmarks were slightly in the red. A rare earnings miss from luxury brand Hermes dampened the mood.
Back on Wall Street, investors are awaiting another heavy release of housing and jobless data and earnings updates, including Netflix, on Thursday. March retail and industry figures on Wednesday showed only slight misses on the most sensitive readings.
On the trade war front, attention turns to Washington's negotiations with Japan's delegation. Italy's Prime Minister Georgia Meloni also meets President Donald Trump on Thursday.
Now, I'll turn to today's deep dive, where I look at how the Fed's hard-nosed stance in the face of tariff uncertainty and market volatility appears to be winning the battle to keep long-term inflation expectations anchored. |
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Fed winning with its 'cruel-to-be-kind' strategy |
The Federal Reserve's job is complicated and simple at the same time: hold the line on interest rates, even in the face of pressure, in order to keep long-term inflation expectations under control. If the recently restive bond markets are to be believed, the Fed appears to be doing a pretty good job, especially at a time when unprecedented policy uncertainty is sending near-term inflation expectations spiking. With average U.S. import tariffs set to surge to their highest level in decades and those on Chinese-made goods due to skyrocket, U.S. households' outlook for the cost of living in the year ahead has, unsurprisingly, climbed sharply. The New York Fed's consumer survey for March showed the one-year inflation outlook jumping to 3.6% for the first time in 18 months. The University of Michigan's more recent equivalent poll for April saw the one-year inflation view soar to 6.7%, the highest such reading since 1981. |
Graphics are produced by Reuters. |
The medium-term outlook was messier, with three- and five-year takes from the New York Fed poll barely budging and Michigan survey respondents expecting five-year inflation to climb to 4.4%. Wide discrepancies in inflation views based on political affiliation further complicate things and inject ever more caution into all interpretations of public inflation perceptions. |
But despite any household anxieties about tariff-induced price rises, long-term market-based measures of inflation expectations are actually falling back quite significantly. |
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Graphics are produced by Reuters. |
As the U.S.-China trade war escalates, everyone is watching China's holdings of U.S. government debt like a hawk, especially following a serious disturbance in Treasury markets last week. Treasury data on foreign holdings of U.S. debt securities released on Wednesday are only for February - before the tariff spiral truly kicked off. But the numbers showed holdings by Chinese entities actually ticked up during the month, though that's likely only part of the picture. China held $784.3 billion, up from $760.8 billion, and Japanese investors also upped their lot too. There is a presumption that many Chinese holdings are held in proxy in Europe, most likely captured as Belgian holdings where the Euroclear clearing house is based. That said, Belgium-based holdings also rose by almost $20 billion in February too. So if China has offloaded Treasuries of late, we will have to wait for further hard data to find out. |
- European Central Bank policy decision, with press conference from ECB President Christine Lagarde
- U.S. March housing starts/permits, weekly jobless claims, Philadelphia Federal Reserve's April business survey
- Federal Reserve Board Governor Michael Barr speaks
- International Monetary Fund Managing Director Kristalina Georgieva speaks ahead of IMF/World Bank Spring meeting
- Japan Economy Minister Ryosei Akazawa meets U.S. Treasury Secretary Scott Bessent in Washington. Italy's Prime Minister Giorgia Meloni meets U.S. President Donald Trump in Washington
- U.S. corporate earnings: Netflix, American Express, State Street, Blackstone, Charles Schwab, Snap-On, Fifth Third Bancorp, DR Horton, KeyCorp, Huntington Bancshares, Marsh & Mclennan, UnitedHealth, Truist Financial, Regions Financial etc
- U.S. Treasury sells 5-year inflation protected securities
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. |
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