Marketmind: Record Wall St holds, inflation revision eyed

By Thomson Reuters Feb 9, 2024 | 5:03 AM

A look at the day ahead in U.S. and global markets from Mike Dolan

Having briefly cracked the 5,000 point milestone for the first time on Thursday, Wall Street’s S&P500 looks set to hold the line and sustain near 5% gains for the year so far – while a thin Friday diary put bonds and inflation back in the spotlight.

Overnight markets were quietened by the absence of mainland China due to its Lunar New Year holiday – although another near-1% drop in the still-open Hang Seng in Hong Kong showed dour investor sentiment in China is hard to dispel.

Even though it will now be almost a week before any market reaction, there was some rare positive economic news from Beijing. New bank loans in China jumped more than expected to an all-time high in January as the central bank moved to boost credit – reinforcing expectations for more stimulus to come.

But economics is only part of the problem for overseas investors exiting the world’s second largest economy and little solace will have been taken from China’s President Xi Jinping doubling down on Beijing’s deepening alliance with Moscow in a call with Russian President Vladimir Putin on Thursday.

Back in U.S. markets, the mood is clearly very different as record high stocks grind ever higher as the white heat of another impressive corporate earnings season passes – with chip designer Arm’s near-50% share surge the standout earnings-day reaction on Thursday.

And yet politics is never far away from Wall St’s mind either. Donald Trump appeared headed for a big legal victory at the U.S. Supreme Court as the justices on Thursday signaled their readiness to reject a judicial decision kicking the former president off the ballot in Colorado for taking part in an insurrection during the 2021 Capitol attack.

On more prosaic matters, Friday’s focus will be on benchmark U.S. consumer price index revisions for last year – a sometimes nebulous data release that’s taken on more importance during the cost-of-living crisis over the past year and which last year pushed the Federal Reserve into an even tighter policy stance.

The revisions come ahead of the critical January CPI update next week and which is expected to show some easing back of inflation after a surprise jump the prior month.

But with Fed officials signalling loudly that they are in no rush to commence cutting interest rates just yet – and despite well received 10- and 30-year Treasury auctions this week – bond yields crept higher again before Friday’s open.

Ten-year Treasury yields nudged up to two-week highs above 4.17%.

And an emboldened dollar pushed higher on the back of that powerful constellation of growth-fueled bond yield gains and record high U.S. stocks. Dollar/yen clocked another two-month high following this week’s relaxed Bank of Japan take on future policy tightening there.

However, the International Monetary Fund on Friday urged the BoJ to consider ending its yield curve control and massive bond purchases now, and then gradually raise short-term rates.

European central bankers were perhaps less relaxed – very much chiming with the Fed take on remaining patient before cutting rates and most wanting to be assured disinflation is entrenched before voting for rate cuts.

Bank of England hawk Jonathan Haskel, who voted to raise interest rates last week, said he is encouraged by signs that Britain’s inflation pressures might be on the wane but he would need more evidence of a cool-down before changing his stance.

Britain’s 10-year gilt yield hit its highest level in almost two months early on Friday.

ECB policymakers also urged caution and stressed the need for more data to build confidence inflation will return to 2%.

In European earnings, Ubisoft jumped nearly 14% after the video games group reported third quarter net bookings slightly above its forecast.

There was a mixed picture from the region’s leading luxury stocks. Shares of Hermes added 4.5% to a new record high after the Birkin bag maker’s sales jumped in the fourth quarter – but L’Oreal dropped 6.3% after the French cosmetics maker missed estimates – with Chinese travellers spending less on shopping.

And much like the latest regional bank wobbles stateside, there’s ongoing worries in some European banks about their exposure to ailing commercial real estate loans. Deutsche Pfandbriefbank’s shares continued their decline on Friday, dropping more than 3% and its bonds remained under pressure on those concerns.

Key diary items that may provide direction to U.S. markets later on Friday:

* Canada Jan employment report

* Dallas Federal Reserve President Lorie Logan

* German Chancellor Olaf Scholz travels to United States for two-day visit

* U.S. corporate earnings: Pepsico, Catalent

(By Mike Dolan, editing by Ros Russell; mike.dolan@thomsonreuters.com)