MARKET WRAPS
Watch For:
ECB rate decision, EU foreign trade, Eurogroup meeting of eurozone finance ministers, Eurosystem staff macroeconomic projections for the euro area, European Stability Mechanism board of governors annual meeting; France CPI; trading updates from Fuller Smith & Turner, Halma
Opening Call:
Shares may open lower in Europe on Thursday after the U.S. Federal Reserve paused on interest rates but offered a hawkish outlook. In Asia, stock benchmarks were mostly higher; Treasury yields mostly rose; the dollar was firmer; while oil and gold lost ground.
Equities:
European shares seem headed for a cautious start after the Fed left rates steady in June, and with the market now waiting for the European Central Bank’s rate decision.
The Fed opted not to lift interest rates, while penciling in another 50 basis points of potential hikes later this year.
“The pause or the skip, combined with higher forecast rates, was initially interpreted negatively,” said Makena Capital Management. “But (Fed Chair Jerome) Powell kind of downplayed that and emphasized he still thinks we’re on track for a soft landing.”
The question now turns to whether July will bring another interest-rate hike and whether more could follow later this year. A continued stretch of strong economic data has suggested that beating inflation might require more tightening, but some economists warn that the Fed’s previous rate boosts haven’t yet taken full effect.
“I think there’s a limit to how far you can stretch the immaculate-disinflation story,” Renaissance Macro Research said. “This idea that inflation will just take care of itself-that does strain credulity a bit.”
The ECB rate decision comes at 2:15 p.m. Central European time (8:15 a.m. Eastern), followed by a press conference with ECB President Christine Lagarde a half-hour later.
The ECB is expected to increase its key rate by a quarter-point, taking rates to 3.5%, bringing the cumulative increases to 4 percentage points this cycle.
Forex:
The dollar strengthened in Asia amid worries over further Fed tightening spurred by the FOMC meeting’s outcome.
The Fed left no doubt that the June FOMC meeting was just a hawkish “pitstop,” with the central bank on course for more rate increases, said Mizuho Bank.
However, the dollar’s strength on the Fed decision is short-lived and not enough to take the greenback away from a weakening trend.
The rate decision was accompanied by new economic projections indicating Fed officials see the fight against inflation as not over yet, with more hikes potentially on the horizon.
The odds of a rate cut this year fades away in the CME’s FedWatch tool, which now prices 44% odds of a 5.25%-5.5% rate in December, surpassing the 37% odds of ending 2023 at the current 5%-5.25%. A 25-basis point hike is priced in for July.
Bonds:
Treasury yields mostly gained, as the Fed halted its rate-increasing cycle while indicating further hikes may be upcoming.
Markets are now pricing one more hike in July, while reducing bets of rate cuts this year, as the Fed faces resilient inflation.
Fed officials now foresee the median fed funds rate ending the year at 5.6%, up from 5.1% in their March projection. Tradeweb says in a note that yields of all maturities remain well below that level.
“The Fed sees better and stronger economic growth and higher inflation,” said RBC Wealth Management in Minneapolis. “Markets were looking for, at most, one more rate hike this year so they were definitely caught off guard by the idea that the Fed thinks it needs to raise rates twice more in 2023,” it said.
Investors have scaled back bets that the Federal Reserve will cut interest rates this year due to a recession.
Forecasting two more rate increases at this stage “is ambitious,” said FHN Financial. “So far the market’s reaction has not really been buying it.”
As it stands, investors aren’t expecting that rates will rise quite as high as they did right before the March bank failures. But they have also significantly scaled back bets that the Fed will cut interest rates this year due to a recession, largely embracing the mantra that rates will stay “higher for longer.”
Energy:
Oil futures dipped in Asia, following a possible technical rebound on the heels of a moderate fall overnight.
Oil prices were whipsawed Wednesday, analysts said. While oil prices were boosted earlier in Wednesday’s session by comments from the IEA that the oil market will tighten significantly in the near term, as China’s consumption rebounds from the pandemic, oil prices later fell amid signs of weaker demand, ANZ Research said.
Energy prices Wednesday didn’t see a major selloff in the wake of the builds across the energy complex, and that is likely because Saudi Arabia has agreed to cut its oil production in July, the U.S. government has plans to replenish the SPR, and Atlantic hurricane season has the potential to disrupt supplies, said Tyche Capital Advisors.
Still, supplies are expected to struggle to keep pace with demand at least in the near term, the IEA expects a situation that will sharply tighten the oil market and could send prices higher.
The IEA forecast growth in demand for crude oil to slow sharply within five years and peak before the end of the decade, as electric-vehicle uptake surges and developed nations rapidly transition to cleaner sources of energy.
Metals:
Gold edged lower amid concerns of more Fed tightening following the FOMC meeting outcome and Fed Chair Powell’s comments.
While the Fed paused rate increases, the U.S. central bank strongly signaled more tightening is coming, said Oanda. With inflation risks to the upside, rate-cut bets will likely get pushed back further into next year, it added.
“We believe that the Fed is playing it safe here, and they have balanced their action with the statement,” said Zaye Capital Markets.
“It is likely that once the dust is fully settled, this equity market will begin to roar again, and we expect the dollar index to move lower, which means the current weakness in the gold price could be an opportunity.”
“The uncertainty surrounding future Fed monetary policy is likely to continue into the near future,” said Jeff Klearman, Portfolio Manager of GraniteShares, which runs the GraniteShares Gold Trust.
“Concerns surrounding the effect of cumulative rate hikes on future economic growth, as well as concerns regarding regional bank stress, seems to have tilted investor expectations in favor of a less aggressive Fed going forward and, as a consequence, of potentially higher gold prices.”
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Copper prices declined, easing from previous gains. Prices had risen in the previous session amid expectations for further stimulus measures from China, ANZ said.
The focus for Thursday is on China’s industrial-output data and whether that will prompt further easing measures from the People’s Bank of China.
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Chinese iron-ore prices extended gains for a third straight session, underpinned by a solid demand outlook.
Resilient demand for ferrous metals is continuing to support iron-ore, Baocheng Futures said.
It expects the commodity’s prices to fluctuate in the short term amid some potential policy shifts, but to remain at high levels.
TODAY’S TOP HEADLINES
Fed Holds Rates Steady but Expects More Increases
WASHINGTON-Federal Reserve officials agreed to hold interest rates steady after 10 consecutive increases but signaled they were prepared to raise rates next month if the economy and inflation don’t cool more.
New economic projections, released Wednesday after their two-day policy meeting, strongly suggested officials were leaning toward slowing down their increases rather than stopping them altogether. Most of them penciled in two more rate increases this year, which would lift them to a 22-year high, and boosted their expectations for growth and inflation.
China’s Central Bank Cuts Key Policy Rate
China’s central bank cut a key policy rate for the first time since August on Thursday, a widely-expected move as Beijing ramps up policy support to boost the economy amid a darkening growth outlook.
The People’s Bank of China said it lowered the rate on 237 billion yuan ($33.08 billion) of one-year medium-term lending facility loans to the country’s financial institutions to 2.65% from 2.75%.
China’s Economic Activity Cooled in May
Growth in China’s consumption and industrial production cooled in May, showing that the country’s economic recovery is losing momentum, official data showed Thursday.
Retail sales, a proxy for China’s consumption, rose 12.7% from a year earlier in May, down from an 18.4% increase in April, said the National Bureau of Statistics. The result missed the 13.1% growth expected by economists surveyed by The Wall Street Journal.
Music Companies Sue Twitter for More Than $250 Million in Damages Over Alleged Copyright Violations
A group of music publishers representing songwriters from Taylor Swift to Beyoncé is suing Twitter for alleged copyright infringement, arguing that the platform benefits from the use of songs it hasn’t paid for.
Twitter users regularly post videos that include popular music, and artists want to be paid when their work is used that way. The Elon Musk-owned company is one of the only social-media platforms that hasn’t forged licensing arrangements governing the use of music on its service.
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Expected Major Events for Thursday
04:30/NED: May Unemployment
05:30/IRL: Apr Goods Exports and Imports
06:00/NOR: May External trade in goods
06:00/SWE: 1Q Financial accounts
06:30/SWI: May Import Price Index
06:30/SWI: May PPI
06:45/FRA: May CPI
07:00/SPN: Apr Trade Balance
08:00/POL: May CPI
08:00/POL: Apr Merchandise trade
09:00/EU: Apr Foreign trade
12:15/EU: ECB interest rate announcement
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June 15, 2023 00:18 ET (04:18 GMT)
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