MARKET WRAPS
Watch For:
EU flash consumer confidence indicator, ECB General Council meeting, EU European Systemic Risk Board general board meeting; France monthly business survey; UK interest rate decision, consumer confidence survey; no major corporate updates expected
Opening Call:
Shares are off to a shaky start in Europe on Thursday after U.S. Federal Reserve chief Jerome Powell flagged more rate hikes and ahead of the Bank of England's rate announcement. In Asia, stock benchmarks mostly fell; Treasury yields are barely changed; the dollar weakened; while oil and gold retreated.
Equities:
European stocks could kick off in the red on Thursday after Fed Chair Powell told Congress to expect more rate hikes this year, with inflation still running well above the central bank's 2% annual target.
All eyes are also now on the Bank of England as it announces its latest interest-rate decision Thursday.
Fed officials kept their policy rate in a 5%-5.25% range in June, but signaled potentially two more rate hikes this year. The Fed's "dot plot" indicates the benchmark rate could peak in a 5.5%-5.75% range.
TradeStation said Powell is "straddling the fence between hawk and dove" by emphasizing elevated inflation but also expectations that prices will ease. As a result, it will keep his options open for the next FOMC meeting in late July as policymakers will have the chance to assess another whole month of economic data by then.
However, unless the employment picture slows sharply between now and then, investors will probably keep expecting one more 25-basis-point hike to satisfy the hawks on the board, it said. "Policymakers don't want to get caught napping again in their fight against inflation."
Forex:
The dollar lost ground in Asia amid mixed developments.
While Fed Chair Powell signaled that more rate increases would be needed to contain inflation, markets doubt whether the U.S. central bank's rate-hike cycle can be sustained, as high rates could strain the banking system and drain liquidity, CMC Markets said.
"The market is still very confident that the Fed's call for two more hikes is going to be wrong" and keep betting on only one more, Oanda said. Meanwhile, the European Central Bank and the Bank of England may need to be more aggressive, Oanda added.
The BOE could boost interest-rate rises after U.K. inflation topped expectations for the fourth month in a row, Berenberg said.
Headline CPI inflation in May matched April's level, rather than falling as analysts had expected, while core inflation rose to its highest since March 1992, versus staying unchanged as economists had forecast, Berenberg said.
Berenberg now expects three--rather than two--0.25 percentage-point rises in the next few months, including one this month, one in August and another in September.
"The risk to our call is tilted towards more aggressive tightening, including a possibility the BOE may opt for a 50 basis-point move at one of its next two meetings," Berenberg said.
Bonds:
Treasury yields are steady in the wake of Powell's testimony.
Powell's remarks offered little surprise and markets keep betting that softening economic conditions eventually will force the Fed to hike only once more, rather than twice as projected by the Federal Open Market Committee. Powell is expected to repeat the message later in the day in the Senate.
AmeriVet said that when it comes to policy, speed is no longer an issue as much as finding the right level. The FOMC "generally believes higher rates will be necessary," AmeriVet said, and that is the point Powell tries to drive home.
Fitch says rates are likely to keep rising in developed countries, while emerging market central banks start to ease soon.
"We now expect the Fed and the ECB to raise rates two more times in the coming months to peaks of 5.75% and 4.5%, respectively, and the Bank of England to raise rates to 5.25%. No subsequent cuts are expected until 2024," Fitch said. "In EM, by contrast, China recently cut rates and Brazil and Mexico are expected to cut later this year."
Energy:
Oil futures headed lower in Asia amid possible position adjustment, although losses are likely to be limited.
There appear to be more signs of growth in China, ANZ Research said, citing remarks from Chinese Vice Premier He Lifeng.
The vice premier reportedly said that China's economy has been improving, with stable growth in the manufacturing industry and the recovering services sector, ANZ noted.
Disappointment in China's rebound following the lifting of Covid curbs earlier this year has weighed on crude prices in 2023.
"In recent weeks, there has been increasing concern over China's demand outlook, despite Chinese oil demand indicators looking fairly good up until now," ING said, noting that China's National Petroleum Corporation expects domestic oil demand to grow 3.5% year-over-year in 2023, down from a forecast of 5.1% in March.
"China's demand outlook is crucial for the global market, given that the bulk of global demand growth this year is expected to be driven by China. Significantly weaker Chinese demand would also mean that the global oil balance would not be as tight as currently expected over the second half of 2023," ING said.
Metals:
Gold fell in Asia as the market weighed Powell's latest remarks after the central bank held its policy interest rate steady last week but signaled there may be two more rate rises this year to lower U.S. inflation further.
It isn't only the Fed, but also the BOE and risks of many more rate increases that are making non-interest-bearing gold less attractive, said Oanda.
If the BOE ultimately has to do super-sized hikes, this could suggest more aggressive tightening might occur with other major central banks, it added.
---
Copper edged lower, pulling back in a possible technical shift, following gains overnight amid signs of improving demand for the metal in China.
ANZ noted that China's power-grid investments grew 10% on year in April, while solar capacity additions more than tripled in gigawatt terms.
Both developments bode well for demand for copper, a key material for power transmission and renewables. There has also been a sharp drawdown in copper inventories at Shanghai Futures Exchange warehouses, ANZ added.
TODAY'S TOP HEADLINES
Fed's Powell Says Interest-Rate Pause Is Expected to Be Temporary
Federal Reserve Chairman Jerome Powell said the central bank was likely to raise interest rates in the coming months but more slowly than previously.
Fed officials left rates unchanged last week after lifting them at 10 straight policy meetings to combat inflation. But investors, consumers and borrowers shouldn't think they were done, Powell told the House Financial Services Committee on Wednesday.
Chicago Fed's Austan Goolsbee Not Certain What Central Bank's Next Move Should Be
The president of the Federal Reserve Bank of Chicago said he doesn't know how he will vote on a potential interest-rate increase at the central bank's next meeting in July.
"We are in this weird foggy environment where it is hard to figure out where the road is," Chicago Fed President Austan Goolsbee said Wednesday at The Wall Street Journal's Global Food Forum in Chicago.
European Business Confidence in China Falls to Record Low, Poll Shows
BEIJING-The confidence of international businesses in China is at a record low as the hoped-for recovery in the world's second-largest economy fizzles and Beijing's relations with its biggest trading partners deteriorate.
Almost two-thirds of respondents in a European Union Chamber of Commerce in China poll said business became harder over the past year, up 4 percentage points from the previous year and the highest since the surveys began. Eleven percent of respondents said they have shifted investments out of China, or made the decision to do so, the poll, released Wednesday, showed. A further 7% said they were considering doing so.
Ukraine's Offensive Slows Down, Zelensky Says, as Kyiv Rethinks Approach
Ukrainian forces are proceeding more slowly than planned in their offensive to retake occupied areas, President Volodymyr Zelensky acknowledged, as military commanders said they are taking time to reassess tactics, adjusting to Russia's extensive minefields and attacks from the air.
The Ukrainian military seized eight villages and an area of some 44 square miles during its offensive in the south that began more than two weeks ago, but has also incurred significant losses of Western-supplied tanks and fighting vehicles. Most of the Ukrainian reserve brigades trained and equipped for the offensive haven't yet entered combat, however.
Mallinckrodt Pays Executives $3.4 Million in Bonuses After Skipping Interest, Opioid Payments
Mallinckrodt, the financially distressed pharmaceutical company that delayed a payment due last week under an opioid-related settlement, said Wednesday that it has paid $3.4 million in retention bonuses to senior executives in advance of a possible bankruptcy.
The generic drugmaker said in a securities filing that four executives have received bonuses amounting to 150% of their current base salaries. The company approved the retention bonus plan last week for the key employees: its chief financial officer, chief legal officer, chief transformation officer and head of specialty generics.
New EU Sanctions Target Russia Loopholes
The European Union agreed to set up a new sanctions regime that slaps export bans on third countries for helping Russia sidestep Western restrictions, one of several measures meant to tighten economic pressure on Moscow, diplomats said.
The 27-nation bloc didn't enact a proposed trade ban against eight Chinese companies for supplying Russia with goods that have a military use. Following discussions with Beijing, the EU blacklisted only three of the firms, diplomats said.
Twitter CEO Intervened to Mend Google Relationship After Cloud Payment Issue
(MORE TO FOLLOW) Dow Jones Newswires
06-22-23 0016ET
