- Fed rate cut bets ease after upbeat US data
- Wall Street rally loses steam, dollar rises as yields recover
- Concerns about global growth and disappointing US-China summit also weigh on sentiment
Post-CPI euphoria fades
Stocks weakened while the dollar remained generally firmer on Thursday as the relief rally following this week’s colder-than-expected US CPI readings lost steam following some not-so-weak data. from yesterday. Treasury yields regained their footing to recover from the CPI-triggered slide as better-than-expected retail sales and manufacturing numbers undermined market conviction that the Federal Reserve will begin cutting rates next year .
The U.S. dollar rebounded from more than two-month lows against a basket of currencies, while stocks on Wall Street pared earlier gains to close only marginally higher.
But the reaction was nonetheless modest, with rate cut expectations only slightly reduced, underlining once again the fact that investors are quicker to value rate cuts than to rule them out. Although this tilt poses a significant risk to Wall Street’s impressive recovery from the depths of October’s five-month low, yesterday’s data also supports the narrative of a soft landing for the US economy, so there is no case for pessimism in neither of the two scenarios. .
More data, Fed speakers and retail earnings on the horizon
However, a further decline in stocks is possible today if the latest weekly jobless claims numbers, as well as the release of other data that will include the Philadelphia Federal Reserve Index and industrial production for October, also exceed expectations. . Investors will also be watching for any policy-related comments from the Federal Reserve’s Waller and Williams, who will speak later in the day.
But as was the case on Wednesday, there could be some upside on the earnings front. Retailers are in the spotlight this week and after Target’s strong results set the bar high yesterday, it will be Walmart and Macy’s turn to release earnings before the market opens. Alibaba’s earnings will also be closely watched.
Meanwhile, there has been some relief for investors after Congress passed a stopgap spending bill that keeps the government funded at least until January 19.
China woes weigh on Asian stocks
In Asia, however, traders were unimpressed by the outcome of the long-awaited face-to-face meeting between the presidents of the United States and China at an APEC summit yesterday. Although Biden and Xi made progress on certain issues such as military cooperation, the talks marked only a slight thaw in relations between the two superpowers.
For Chinese investors, there was much more at stake in this meeting than for their American counterparts, as the country’s leaders struggle to revive the stagnating economy. Data released today showed that the property market slump deepened in October, pointing to a slow and prolonged recovery ahead.
The Chinese and Hong Kong indices underperformed, while the China-sensitive Australian dollar fell, although there was some support for the Australian dollar due to a bigger-than-expected rise in domestic employment in October.
Light at the end of the euro and pound tunnel?
Overall, the economic outlook outside the United States does not look particularly encouraging at the moment: GDP contracted in both the eurozone and Japan in the third quarter, and China’s recovery still looks very patchy.
If there is a silver lining, it is that inflation is firmly on the decline and, for currencies like the euro and pound, this may not be entirely a negative. Both currencies suffered as fears of excessive tightening intensified. Now that inflation appears to be under control for the ECB and the Bank of England, recession risks are being priced in to some extent, cushioning the blow of expectations of rate cuts coming forward.
This may also explain why the euro and pound rose as much as other major currencies when the US dollar plunged after the CPI report, leaving only the yen lagging behind.