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Opening Call:
Shares may open slightly lower in Europe on Thursday, with corporate earnings under way. In Asia, stock benchmarks were broadly lower; Treasury yields were little moved; the dollar gained slightly; while oil and gold futures declined.
Equities:
Stock futures indicate a slightly lower open in Europe on Thursday, as investors weigh another batch of corporate earnings and bets rise that the Bank of England will raise rates even higher after the latest U.K. inflation data.
RBC Capital Markets has revised its BOE call to a 25 basis points rate increase on May 11, having previously expected the bank to keep the rate unchanged at 4.25%, after this week's above-forecast U.K. wage growth and inflation data.
"The combination of domestically generated inflation pressures plus the labor market backdrop is likely to ensure a majority on the MPC [BOE's Monetary Policy Committee] in favor of a 25bps rate increase at the next meeting to 4.50%," RBC said.
"Beyond that, we see the Bank on hold for the remainder of the year."
Meanwhile, New York Fed President John Williams said late Wednesday that he expects inflation, as measured by the personal consumption expenditure price index, will decline to around 3.25% this year from 5% in February. Inflation will then move down to the Fed's longer-run 2% goal over the next two years, he said.
But at the moment, a key inflation measure that the Fed is watching -- service inflation minus food, energy and housing -- "is not budging," he said.
"Inflation is still too high and we will use our monetary policy tools to restore price stability," Williams said, without being more specific.
Williams said data from the first quarter showed the economy continues to expand at a "solid pace." He said he expects real GDP growth "to be really modest" this year. In contrast, the Fed staff has forecast a recession starting later this year.
Jeffrey Roach, chief economist for LPL Financial, said the U.S. economy is at an important inflection point.
"The job market will likely cool as growth stalls in the coming months. The upside from the picture painted by the Beige Book is the Fed will have some leeway to cut rates by the end of the year as inflation moves closer to the Fed's long run target," he said.
The Fed's latest Beige Book on Wednesday showed that U.S. economic activity was "little changed" in late March and early April.
"Investors should anticipate a positive move in risk assets," Roach added.
Read: Why bears can't keep the stock market down despite bad news
Forex:
The dollar gained slightly in Asia as traders mulled the prospect of Fed rate increases, which would boost the appeal of U.S. fixed-income assets and demand for the greenback.
The market is pricing in a cumulative 31bp worth of Fed rate hikes through June, said RBC Capital Markets.
The U.S. Treasury yield curve has been inverting through April as the rate increases have been priced back in and rate cuts priced out, it said.
JPMorgan's latest survey shows only 39% of participants giving a hard no when asked if recent dollar weakness will continue.
Twenty-seven percent of survey takers see dollar weakness continuing broadly, 22% only see weakness continuing vs the Swiss franc, yen and euro and 13% see softness persisting against G10 currencies but not emerging market ones.
JPMorgan said currency market participants have gravitated from a banking crisis narrative to a U.S. mediocrity one.
"The former would be USD bullish, the latter USD bearish, particularly in conjunction with a Fed pause and an upturn in growth momentum outside the US."
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Optimism over the eurozone's economic growth, expectations the European Central Bank has further to go in raising interest rates and lower energy prices may still lend support to the euro but only temporarily, Danske Bank said.
Danske Bank forecasts EUR/USD will fall to 1.03 in 12 months, from 1.0964 currently, as headwinds from policy tightening will increasingly filter through to the eurozone economy.
"In Europe, several factors have contributed to easing energy crisis fears, while a reopening of China has contributed to renewed industrial optimism," but a persistent strong eurozone recovery is unlikely, it said.
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Sterling's appreciation since the start of the year doesn't mean the outlook has improved enough to compel global investors to return to U.K. asset markets, Bank of America said.
A return to U.K. asset markets by foreign investors is key for a positive sterling outlook, it said.
However, investors remain "nervy" in their allocations to the U.K. so sterling may struggle to sustain its upward momentum, which looks overbought, it said.
"We are less concerned about the outlook in 2023 than we were about the outlook in 2022 but are also aware that reputational damage and a fundamental reappraisal of pros and cons of Brexit will continue to limit investor participation."
Bonds:
Treasury yields were little changed early Thursday, a day after sticky U.K. inflation caused a broad selloff in government bonds that forced up yields.
Wednesday's U.K. inflation report spurred big selling volume in Treasury futures overnight, and wasn't entirely surprising considering this week's "modest to low" economic data flows from the U.S., said Jim Vogel, executive vice president at FHN Financial in Memphis.
"We've always been alert to EU [European Union] and U.K. inflation, but the story in the U.K. has been more volatile," Vogel said.
"As a result, the market is pricing in a higher probability that the Bank of England delivers another hike when the decision is made on May 11," BMO Capital Markets said.
"The Treasury market traded weaker overnight in a sympathy move that brought 10-year yields as high as 3.635%," it said.
"If the Bank of England thought inflation's worst was done, and inflation surprises to the upside, why couldn't it happen here? The idea that traders and markets could be surprised again by inflation in the U.S. got reactivated overnight," Vogel added.
Markets are now pricing in an 86% probability that the Fed will raise interest rates by another 25 basis points to a range of 5% to 5.25% on May 3, according to the CME FedWatch tool.
The central bank is mostly expected to take its fed-funds rate target back down to between 4.5% and 4.75%, or lower, by December, according to 30-day Fed Funds futures.
Energy:
Oil futures fell in Asia, extending overnight declines amid lingering concerns on the outlook for energy demand.
An economic survey from the Fed, which showed the U.S. economy stalled in recent weeks amid slower hiring and tighter credit, also magnified recent concerns that monetary tightening has weakened demand for oil, ANZ analysts said.
A stronger USD was also weighing on investor appetite, they said, adding that the market is likely to "remain fixated on the demand outlook."
Metals:
Gold futures were lower early Thursday, on a stronger U.S. dollar amid calls from some Fed officials for further interest-rate increases.
The repricing of U.S. rate expectations is weighing on the precious metal and it may test support, DailyFX senior strategist Nick Cawley said.
"Gold is now looking at an important support level near $1,961/oz, a prior level of resistance that turned into support."
The fall below the psychologically important $2,000 "threshold reflects a macroeconomic environment in which interest rates are still rising with the European Central Bank as well as the Fed set to raise their benchmark rates in May," said Rupert Rowling, market analyst at Kinesis Money.
"Still, even with the recent pullback, gold remains at very elevated levels considering the price was languishing close to $1,800 an ounce as recently as early March," he said.
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Aluminum futures fell in Asia amid negative market sentiment spurred by weak U.S. economic data released Wednesday.
However, losses in the industrial metal could be limited by supply-side issues, analysts said.
There were growing risks of supply disruptions in China, ANZ Research analysts said.
China's Yunnan province, which is a major hub for aluminum smelters, was facing a drought, which could undermine its large hydropower sources, they added.
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Chinese iron-ore futures declined early Thursday, extending losses after the country's state planning body said Wednesday that it will again tighten supervision of the iron ore sector and crack down on speculation.
As steel mills' margin contraction accelerate alongside mounting regulation risks, these factors will likely pressure future demand for ore, Baocheng Futures said.
TODAY'S TOP HEADLINES
Fed's Williams says inflation is slowing and labor market is cooling
The latest economic data seems to be breaking the Federal Reserve's way, with cooling of both inflation and the labor market, according to New York Fed President John Williams on Wednesday.
In an evening speech to a group of bond-market experts known as the Money Marketeers of New York University, Williams said the most recent data is showing that a "trend of slowing inflation is continuing." At the same time, there are some indications of a "gradual cooling in the demand for labor."
China's PBOC Keeps One-Year Loan Prime Rate Steady
China's benchmark lending rates were kept unchanged, as signaled by unchanged policy rates earlier this week, suggesting that Beijing is comfortable with the current pace of the country's economic recovery led by consumption.
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04-20-23 0014ET
