A look at the day ahead in the US and global markets from Mike Dolan.
As global markets reassess the US interest rate horizon, massive yield spreads, trade gaps and political divisions support the dollar around the world – especially in Asia.
This week’s US inflation surprise has lifted the entire US interest rate structure for the next year or more. The Fed’s forecast peak rate for next March’s policy jumped almost half a percentage point to 4.4% – two full points above current rates – and two-year Treasury yields reached a 15-year high of 3.84%.
A flood of retail, manufacturing and employment indicators in the US on Thursday will give another reality test.
But while Europe’s central banks are at least partly matched by the Federal Reserve in trying to navigate their own inflation problem, the authorities in China and Japan are not, and exchange rate pressures continue to grow.
China weakened again on Thursday towards its lowest level in two years near 7 against the dollar. Despite money market operations by the People’s Bank of China to support unity ashore, its comprehensive monetary policy is easing to support the faltering economy, and five of China’s largest banks cut deposit rates on Thursday. China will release a slew of data on Friday.
With Shanghai stocks underperforming on a more mixed day relative to other Asian bourses, the divided geopolitical background is not helping.
China said it had lodged “official protests” with the United States after a US Senate committee introduced legislation that would boost US military support for Taiwan.
The West views with concern the deepening partnership between China and Russia. Chinese President Xi Jinping met with Russian leader Vladimir Putin in Uzbekistan on Thursday.
Meanwhile, Japan’s refusal to tighten monetary policy is putting pressure on the yen. The combination of a stronger dollar – up 25% against the yen this year – and very high energy import costs saw the country post a record trade deficit in August.
There were official doubts about the effectiveness of the currency market without changing monetary policy. A senior member of the country’s ruling party has warned that efforts to stem the yen’s sharp declines through unilateral market intervention will have only a limited impact.
Global stocks and US stock futures remained firm in the background.
In the world of cryptocurrency, the long-awaited “merger” appears to have taken place without any major price differences. The Ethereum blockchain is overhauled, significantly reducing energy use, its inventor and co-founder tweeted.
Both ether and halving prices have fallen this year.
In Britain, new finance minister Kwasi Quarting has caused a political uproar amid reports he is considering scrapping banker bonus caps to boost post-Brexit London competitiveness against financial capitals such as New York and Hong Kong.
Key developments that should provide further guidance to US markets later on Thursday:
* Russian President Vladimir Putin and Chinese President Xi Jinping met at the Shanghai Cooperation Organization summit in Uzbekistan
* European Central Bank Vice President Luis de Guindos. Board Member Elizabeth McCall and Bank of Portugal President Mario Centeno speak
* US retail sales in August and industrial production; Weekly Unemployment Claims August Import/Export Rates; Business Index for September from the Federal Reserve Bank of Philadelphia; Fed September Manufacturing Index of New York
* Canada August Housing Starts
* US Securities and Exchange Commission Chairman Gary Gensler speaks before the Senate Banking Committee
* Corporate earnings: Adobe (NASDAQ:)
Chart: US 2-Year Premium Return https://fingfx.thomsonreuters.com/gfx/mkt/myvmnzybxpr/One.PNG
Graphic: Japan’s record trade deficit https://graphics.reuters.com/JAPAN-ECONOMY/TRADE/egvbkrenopq/chart.png
Chart: Ether and Bitcoin halving since the beginning of the year https://fingfx.thomsonreuters.com/gfx/mkt/zgpomolnwpd/One.PNG
(By Mike Dolan; Editing by Kim Coogle; [email protected] Twitter (NYSE:reutersMikeD)