Global markets started the week with cautious optimism as investors weighed the impact of a mixed U.S. jobs report, which prompted a rally in beleaguered bonds. However, a new set of challenges looms on the horizon, with crucial U.S. and Chinese inflation figures awaiting release later this week.
MSCI’s comprehensive index of shares inched lower in subdued trading, reflecting a 2.6% loss endured in the preceding week. European shares commenced the day with marginal movement, except for UK stock markets, which opened on a weaker note, weighed down by the sluggish performance of heavyweight mining stocks. Additionally, Unite Group’s shares slid to the bottom of the index following a rating downgrade.
Chinese blue-chip equities experienced a marginal dip of 0.9%, as investors continued to express disappointment over the lack of substantial and concrete stimulus measures from Beijing. In contrast, the Nikkei index in Japan posted a modest gain of 0.2% by 0822 GMT.
Insights from the recent Bank of Japan meeting revealed that policymakers are considering enhanced flexibility in yield policy to prolong the effectiveness of their super-easy stimulus approach.
S&P index futures indicated a positive shift of 0.5%, while Nasdaq futures displayed a slight uptick of 0.6%.
Approximately 90% of S&P 500 earnings have been reported, outperforming consensus estimates by 4%. Impressively, more than 79% of companies have surpassed expectations, as per Refinitiv I/B/E/S data. Noteworthy upcoming results include those from industry giants Walt Disney (NYSE:DIS) and News Corp (NASDAQ:NWSA).
Anticipation swirls around upcoming data on U.S. consumer prices, with forecasts indicating a mild uptick in headline inflation to an annual rate of 3.3%. However, the more significant core rate is projected to slow to 4.7%.
“Markets are waiting to see this week’s CPI reports out of the US and China,” observed Michael Hewson, Chief Market Analyst at CMC Markets.
While the trajectory of bond markets may be shaped by U.S. bond issuance this week, which has caused notable fluctuations in yields, an array of economic indicators reflects the emergence of “significant disinflation,” Hewson noted.
U.S. yields rebounded by 3-4 basis points after a decline of over 10 basis points on the preceding Friday.
Analysts have signaled that the influx of Treasury supply into the market could exert upward pressure on rates as bond prices decline. Amidst these developments, Fitch downgraded the United States’ credit rating last week. The Treasury Department announced a $103 billion offering in Treasuries, driven by a burgeoning deficit and the imperative to balance the overall profile of debt issues.
Futures currently suggest a mere 12% probability of a Federal Reserve rate hike in September and a 24% likelihood of an increase by year-end.
Michael Gapen, an economist at BofA, cautioned that the market’s expectations of substantial policy easing in the upcoming year remain lofty despite recent robust economic data.
“We now expect a soft landing for the U.S. economy, not the mild recession we had previously forecasted,” Gapen conveyed.
“While the market implies between 120-160 bps of Fed cuts in 2024 we look for only 75 bps,” he added. “There’s simply less reason for the Fed to quickly pivot to rate cuts in 2024 when growth is positive and unemployment is low.”
In response, the bank raised its year-end projections for two-year and 10-year yields by 50 basis points to 4.75% and 4%, respectively.
This shift in yield dynamics provided a modest boost to the U.S. dollar, which demonstrated a 0.2% uptick against a basket of currencies, reaching 102.29.
Conversely, the euro experienced a marginal dip of 0.3% to $1.0976, recovering from last week’s low of $1.0913.
The upswing in the U.S. dollar exerted downward pressure on gold, which slipped by 0.4% to $1,935 per ounce.
