Stocks and the dollar tumbled ahead of a crucial few days

  • European stocks fell in early trade
  • US 2-yr yields hit 15-yr high, dollar hits 3-mth high
  • China shares wobble, yuan weakens on soft inflation data
  • The Nikkei rose 0.6%, with the yen gaining as Ueda was approved as the next BOJ governor
  • Powell reaffirms Hawkish guidance, March rate hike not agreed

LONDON, March 9 (Reuters) – Global markets were in a rare lull on Thursday ahead of weekend U.S. jobs data that could easily trigger more cross-asset storms.

Europe’s equity markets started fractionally lower, with recession warnings becoming increasingly tepid again, despite little movement from dollar/frx or bond markets. / to us

US Federal Reserve Chairman Jerome Powell stuck to his message of higher and faster interest rate hikes during Wednesday’s hearing, but stressed that the decision would depend on the strength of incoming data.

Traders will be looking more closely at Friday’s US payrolls data and then Tuesday’s US inflation numbers.

Financial markets are now pricing in an 80% probability of a 50 basis point rate hike at the central bank’s March meeting, up from around 30% earlier in the week. Expectations are also rising that the US Federal Reserve will raise rates to 6%.

“Our main view is that 5.5% will be enough, but they (the Fed) should stay there longer than the market expects.” said Ian Cunningham, co-head of multi-asset development and co-portfolio manager at Ninety One Global Macro Allocation Fund.

“A recession in the U.S. is our central scenario,” he said, adding that funds are still heavily outnumbered by the dollar, particularly against currencies like the Canadian dollar and Britain’s pound.

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The U.S. dollar index, which measures the greenback’s value against a basket of major peers, was near a three-month high of 105.57. However, the Japanese yen lost 0.4% to 136.78 per dollar.

Japan’s lower house of parliament on Thursday approved government appointee Kazuo Ueda as the next central bank governor, signing a new leadership tasked with exiting too loose monetary policy.

The Bank of Japan, however, is expected to maintain so-called yield curve control and uber-low rates at its current chief’s last meeting on Friday.

Ten-year government yields hit the BOJ’s policy ceiling of 0.5% again on Thursday.

The greenback was buoyant against the Canadian currency at $1.3803 to the Canadian dollar, the highest level in nearly four months, thanks to Canada’s worst-hit Bank of Canada, which kept its interest rates on hold on Wednesday.

Meanwhile China’s yuan weakened towards the key psychological level of 7 to the dollar after the slowest annual consumer price inflation data in a year, raising doubts about the strength of its economic recovery.

Back to the 80s

Benchmark government bond markets are a key lightning rod for both interest rate expectations and the degree of pain that sharp hikes can cause in the global economy.

Two-year Treasury yields hit a 15-year high of 5.04%, while the benchmark 10-year yield was steady at 3.9953%.

More importantly, the gap between the yield on the shorter two-term and the longer-term 10-year Treasury notes hit a negative 108.2 basis points. It was the sharpest reversal since 1981. Reversals are seen as reliable bearish indicators.

In Europe the German 2s10s curve was also at its inversion point since 1992, with the 2-year German yield at a post-2007 high of 3.35% and the 10-year yield at 2.68%.

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“Powell admitted that the March decision was data-driven,” said Thierry Wiseman, global FX and rates strategist at Macquarie. “So the question we face is whether January’s economic rebound was a blip or a trend.”

A warning of early wages sent S&P 500 futures and Nasdaq futures both 0.3% in the red. Indices also struggled on Wednesday after private wages beat consensus estimates and demand for home loans picked up despite higher mortgage rates.

Forecasts for Friday’s key numbers were for a modest wage increase of 205,000 after January’s 517,000 jump.

Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) fell 0.6% after falling 1.4% in the previous session. On the other hand, Japan’s Nikkei (.N225) rose 0.6%.

Commodity prices were mostly lower, with Brent crude at $82.45 a barrel, US crude at $76.39 a barrel and global growth-sensitive metal copper up 1%. Gold was slightly higher at $1817 an ounce.

Additional reporting by Stella Keough in Sydney and Joyce Alves in London; Editing by Angus MacSwan

Our Standards: Thomson Reuters Trust Principles.

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