Global markets pause as US jobs data approaches

London — Global markets were in a rare lull on Thursday before US jobs data at the end of the week that could easily whip up more cross-asset storms.

Europe’s share markets began fractionally lower though there was little movement from either the dollar or bond markets, where recessionary warnings having been becoming increasingly shrill again.

US Federal Reserve chief Jerome Powell stuck to his message of higher and potentially faster interest rate hikes during a hearing on Wednesday, but also emphasised that the decision would hinge on the strength of incoming data.

That means traders will be looking even more intently at US payrolls data on Friday and inflation numbers which follow on Tuesday.

Financial markets are now pricing in a near 80% likelihood of a 50 basis-point rate hike at the Fed’s March 21-22 meeting, up from about 30% at the start of the week. There is also a growing expectation the US central bank could push rates to 6%.

“Our core view is that 5.5% will be enough, but that they [the Fed] will have to stay there longer than the market expects,” said Iain Cunningham, co-head of multi-asset growth and co-portfolio manager of the Ninety One Global Macro Allocation Fund.

“A recession in the US is our central scenario,” Cunningham said, adding though that the fund was still heavily long the dollar, especially against currencies such as the Canadian dollar and the pound.

The dollar index, measuring the greenback’s value against a basket of major peers, hovered close to a three-month high at 105.57, but lost 0.4% to the yen at ¥136.78/$.

Japan’s lower house of parliament on Thursday approved the government’s nominee Kazuo Ueda to be next central bank governor, signing off on a new leadership that will be tasked with steering an exit from ultra-loose monetary policy.

Still, the Bank of Japan (BOJ) is expected to maintain what it dubs yield curve control and extra-low rates at the last meeting of its current chief on Friday.

Ten-year government yields again reached the BOJ’s policy cap of 0.5% on Thursday.

The greenback was also buoyant against the Canadian currency at C$1.3803, the strongest level in nearly four months, thanks to a dovish Bank of Canada, which left its interest rates on hold on Wednesday.

China’s yuan weakened towards 7 to the dollar after the slowest annual consumer price inflation data in a year, fanning doubts about the strength of its economic recovery.

Back to the 1980s

Benchmark government bonds remain the main lightning rod for interest rate expectations and the degree of pain the sharp rises are likely to inflict on the global economy.

The two-year Treasury yields held close to 15-year highs at 5.04%, while the benchmark 10-year yields were steady at 3.9953%.

Most notably, the gap between yields on 2- and 10-year Treasury notes, hit -108.2 basis points — the most extreme inversion since 1981. Inversions are seen as reliable recession indicators.

In Europe, too, the German 2-10 curve was at its most inverted point since 1992, with 2-year German yields at a post-2007 high of 3.35% and 10-year yields at 2.68%.

“Powell conceded that the March decision is data-dependent,” said Thierry Wizman, Macquarie’s global FX and rates strategist. “The question facing us, therefore, is whether January’s economic re-acceleration was a blip or a trend.”

The pre-payrolls caution meant S&P 500 futures and Nasdaq futures were 0.3% in the red. The indices struggled on Wednesday after private payrolls beat consensus estimates and demand for home loans increased despite higher mortgage rates. Forecasts for Friday’s numbers are for a modest payrolls increase of 205,000 after January’s 517,000 jump led markets to reprice their monetary tightening expectations.

Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan sagged 0.6% after falling 1.4% in the previous session. Japan’s Nikkei rose 0.6%.

Commodity prices were mostly lower, with Brent crude back-pedalling to $82.45 a barrel, US crude down at $76.39 a barrel and global growth-sensitive metal copper down 1%. Gold was slightly higher at $1817 an ounce.

Reuters