Futures Rebound As Yields, Dollar Drop, Fed Minutes Loom

After suffering their biggest one-day drop of 2023, US futures rebounded in muted trading on Wednesday, boosted by a drop in rates (the 10Y just hit a session low of 3.92% after rising as high as 3.97%) and weakness in the dollar, even as investors awaited further clues on the direction of monetary policy from the Federal Reserve’s minutes due out at 2pm today. S&P 500 and Nasdaq futures rose 0.3% and 0.4%, respectively, at 7:45am ET; sentiment was boosted by a CNBC appearance of the Fed’s “trial balloon” speaker, St Louis Fed president James Bullard, who was hawkish – saying he favors hiking rates to 5.375% as fast as possible, but not as hawkish as some had feared, leading to a sharp bounce in futures just after 7am. Yields dropped, as did the dollar, while oil, gold and crypto erased earlier losses.

In premarket trading, CoStar Group led declines in US premarket trading after its annual guidance disappointed analysts and News Corp. said it’s no longer involved in discussions to sell its Move subsidiary to the real estate information and services company. Coinbase Global Inc. declined after the cryptocurrency exchange posted a $557 million loss. Here are some other notable premarket movers:

• Palo Alto shares rose nearly 10% after the cybersecurity company’s results beat across the board. Several analysts raised their price targets for the stock, saying the firm is managing macro pressures effectively and executing well on its strategy
• Keep an eye on Constellation Energy as it was cut to neutral from outperform at Credit Suisse as the broker says the green energy group’s shares now look expensive and lack near-term catalysts
• Watch Nordson after it was raised to overweight from sector weight at KeyBanc, with the broker saying a good entry point for the adhesives and sealants company has materialized following a post-earnings decline in its shares
• Morgan Stanley is constructive on US software stocks, given that the moderation in forward IT spending growth is likely to prove less severe than feared. Valuations are still near multi-year trough levels and longer-term demand trends are intact
• Keysight shares fell 7.1% in after-hours trading on Tuesday as the company’s results showed order weakness, and guidance will create cause for concern in the near term, analysts said, though they remain positive on the longer-term outlook for the electronic measurement services firm

Meanwhile disappointing earnings projections are seen everywhere. Walmart Inc. reported a weak profit outlook that fell short of analyst estimates, signaling another rocky year for the world’s largest retailer. Home Depot Inc. also released a profit-decline forecast. Only 68% of S&P 500 companies reporting results this season have beaten estimates, compared with about 80% seen during recent quarters.

Following strong business activity data on Tuesday, a classic example of “good news is bad news for markets”, stocks tumbled as evidence mounted that the Fed may have to hike even more (ignoring for a second the fact that the data is manipulated “strong” for purely political reasons and will soon slump) and prompted fears the powerful stock rally since the start of the year may be coming to an end, as hot economic indicators pressure central banks to keep monetary policy tight. And while until recently investors looked as though they may be pricing in a soft landing for the economy, that may be ending said Stephanie Niven, portfolio manager at Ninety One UK Limited, and hoping strong economic conditions may cushion higher rates.

“We will continue to see investors adjust their expectations,” said Niven. “We see a harsher economic cycle into the second half of this year, and we really think a harder landing is the likely outcome here.”

In a relatively quiet calendar, today’s main event will be the Minutes from the Fed’s Jan. 31-Feb. 1 meeting, which while naturally backward looking, may shed light on the path forward. For context, officials at the meeting voted unanimously to raise rates by just 25 basis points, moderating from a half-point hike in December after four 75-bp increases. The policy statement said the “extent of future increases” will depend on a number of factors including cumulative tightening of monetary policy, wording Fed watchers viewed as a signal the central bank may stick with smaller moves. Watch the minutes for insight into whether a larger hike is still on the table, which in turn may mean the Fed’s terminal rate is higher than some expect.

“Investors are waking up to a stark realization that the Fed’s work is not done, and that interest rates may have to be hiked even higher to cool hot inflation,” Susannah Streeter, the head of money and markets at Hargreaves Lansdown Plc, wrote in a note. “Waves of exuberance, which have propelled equities higher since the start of the year, have turned into tides of disappointment and apprehension about the difficulties that still may lie ahead for the mighty US economy.”

A rocky geopolitical outlook has not helped. President Vladimir Putin said Russia will suspend its observation of the New START nuclear weapons treaty with the US, a decision Secretary of State Antony Blinken called “irresponsible.” President Joe Biden hit back at Putin, saying he would never win his war in Ukraine.

In delayed response to yesterday’s US slump, European stocks fall for a second day after disappointing corporate earnings gave investors another reason to be cautious besides the prospect of tighter monetary policy. The Stoxx 600 is down 0.9%, headed for a second-day loss, though it came off the day’s lows. Lloyds Banking Group Plc dropped, weighing on the FTSE 100 Index, after results and guidance for 2023 came in below analyst estimates, despite announcing a £2 billion ($2.4 billion) share buyback. Miner Rio Tinto Plc fell after reporting lower than expected profit and slashing its dividend due to weak demand for metals in China. Here are some of the biggest movers on Wednesday:

• Lloyds Banking Group shares fall as much as 3% after the lender reported fourth-quarter results and guidance that were mixed with the bank affected by competition in the mortgage market
• Rio Tinto shares slip as much as 3.2% after the mining conglomerate slashes dividends and reports lower-than-expected profits, hurt by weaker demand and higher costs
• Grifols shares fell as much as 8.2%, the most intraday in four months, after the Spanish blood plasma company said executive chairman Steven F. Mayer resigned after four months in the job
• Covivio shares fall as much as 5.4%, the most since December, with analysts saying the French real estate firm’s guidance is soft and that its dividend is lower than expected
• Korian shares fell as much as 20%, set to close at their lowest level since 2006, after the French care home operator reported 2022 full year results that came short of analysts’ expectations
• Siegfried shares fall as much as 11%, the most since 2015, after the Swiss pharma company delivered an outlook analysts considered cautious given its strong performance in 2022
• Danone shares rise as much as 2.8% in early Paris trading, before paring gains, after reporting full-year recurring operating income that beat estimates
• Wolters Kluwer shares rise as much as 3.9%, the biggest intraday climb since October, after the information services company forecast organic sales growth this year will be in-line
• UCB gains as much as 4.9% after the Belgian pharmaceuticals firm reported better-than- expected earnings
• BE Semiconductor gains as much as 9.9% after reporting fourth-quarter orders that blew past analyst estimates
• Stellantis shares rise as much as 3.4% to the highest since March 2022 after the carmaker’s full-year results beat expectations and it announced a buyback of as much as €1.5 billion

Earlier in the session, Asian stocks declined for a second day after the aforementioned jump in US Treasury yields undermined confidence in the equity market’s advance this year, with shares in Hong Kong falling to the brink of a correction. The MSCI Asia Pacific Index fell as much as 1.4% to its lowest level since Jan. 9, with TSMC and Tencent among the heaviest drags on the gauge. Shares in Australia, Japan and mainland China slipped, while losses in Hong Kong’s Hang Seng Index reached almost 10% since a Jan. 27 peak. Technology stocks dropped after Treasury yields touched new highs for the year amid growing concern the Federal Reserve will continue to raise interest rates. Investors are pricing in the federal funds rate climbing to around 5.3% in June. That compares with a perceived peak of 4.9% just three weeks ago.

“We see more signs of a growth slowdown” into year end, Alexander Wolf, Asia head of investment strategy at JPMorgan Private Bank, told Bloomberg Television. Fixed income “still remains our highest conviction call, given what we’ve seen with the move up in yields, you can achieve equity-like returns.”  Read: Investors Stung by Treasuries Rout Brace for Next Fed Blow   A key MSCI gauge of Indian stocks was also on course to enter a technical correction as the selloff in Adani Group shares deepened. Indexes in Vietnam and South Korea were among the biggest decliners in the region as investors awaited the release of Fed minutes from its latest policy meeting. 

Japanese equities fell, following US peers lower on concerns of further Fed hikes and after weak corporate forecasts from US retailers Walmart and Home Depot. The Topix Index fell 1.1% to 1,975.25 as of market close Tokyo time, while the Nikkei declined 1.3% to 27,104.32. Sony Group Corp. contributed the most to the Topix Index decline, decreasing 2%. Out of 2,162 stocks in the index, 431 rose and 1,636 fell, while 95 were unchanged. “Expectations for an early halt to US interest rate hikes and cuts have faded, with the landing point for a rate hike higher than what the market expected,” said Kiyoshi Ishigane chief fund manager at Mitsubishi UFJ Kokusai Asset Management.   

India’s benchmark stocks gauge posted its biggest single-day slump this year as a selloff across global equity markets extended amid worries over interest rates staying higher-for-longer. Sentiment in India continued to be weighed down by the ongoing decline in Adani shares. The rout triggered by US short-seller Hindenburg Research’s report has now stretched to $144 billion, with the group’s flagship firm Adani Enterprises plunging 11% today. All 10 group stocks declined during the session.  The S&P BSE Sensex fell 1.5% to 59,744.98 in Mumbai, the most since Dec. 23 and is close to erasing its gains for February. The NSE Nifty 50 Index declined by a similar measure. “There is an increasing fear that the Fed may remain hawkish for a longer duration than expected, which may even force RBI to keep interest rates high,” Siddhartha Khemka, head of retail research at Motilal Oswal Financial, said in a note. All 20 sector sub-gauges compiled by BSE Ltd. declined, led by utilities, while 29 out of Sensex’s 30 companies closed lower

In FX, the dollar slid against its Group-of-10 currencies, where Sweden’s krona was the best performer followed by the yen while the Australian dollar and British pound are the weakest among. The euro fell a third day, to touch a low of $1.0630. Bund yields were a tad higher, led by longer maturities A German expectations gauge by the Ifo institute rose to 88.5 in February from 86.4 the previous month. That was better than the 88.3 median estimate in a Bloomberg poll of economists

• The Swedish krona outperformed other G-10 peers against the dollar and neared 11 per euro in the wake of comments from the new Riksbank Governor Erik Thedeen, who described underlying inflation figures in January as worrying. He also said that Sweden is currently not experiencing a housing market crash
• The pound fell, erasing some of its Tuesday gains, as investors mulled the UK economic outlook following data that showed the nation is weathering the sharpest cost-of-living crisis in generations better than feared. The gilt yield curve bear-flattened, with yields rising 3-6bps
• The yen advanced as much as 0.3% to 135.06 per dollar as the nation’s benchmark bond yield climbed back above the BOJ ceiling for a second day amid a global bond selloff. BOJ Governor nominee Kazuo Ueda is due to face confirmation hearings in the parliament this week. BOJ Board Member Naoki Tamura says that any decision on conducting a policy assessment will be made by looking at wage growth, prices and the economy. A divergence in the spot and options markets for the dollar-yen pair suggests traders are looking once again to position for possible hawkish signals from BOJ officials
• The New Zealand dollar was little changed after earlier rising as much as 0.4% to 0.6246 even as the RBNZ hiked rates by 50 basis points as expected and forecasting that it would take longer than previously expected to reach its 5.5% peak rate
• The Australian dollar was the worst G-10 performer following a smaller-than-expected wages increase in the fourth quarter. Wage price index rose 0.8% q/q (estimate +1.0%) in 4Q

In rates, Treasuries held on to modest gains as US trading day begins, after erasing declines that pushed yields to new YTD highs, with the exception of the new 2-year note. Shorter-term Treasuries rose more than longer-dated ones in a choppy session. The two-year rate slid 5 basis points from the highest level since early November. Its 10-year counterpart was 3 basis points lower. The 10-year reached 3.966% before dropping as low as 3.92%. Gilts have led European bonds lower as markets continue to price in higher terminal rates for the Bank of England and European Central Bank. UK two-year yields are up 8bps while the German equivalent adds 2bps.

In the US, the Treasury auction cycle continues with 5-year note sale at 1pm New York time, and FOMC releases minutes of Jan. 31-Feb. 1 meeting at 2pm. WI 5-year yield 4.13%; current issue traded as high as 4.185%, still more than 30bp below last year’s multiyear high, as traders are assigning higher odds to more Fed rate increases to follow the 25bp move on Feb. 1. Since then, St. Louis Fed President Bullard — appearing on CNBC — has said he advocated for a 50bp hike and might support one in March, heightening interest in whether the minutes will reveal broader appetite for reacceleration.

Oil extended its longest run of losses this year, with West Texas Intermediate contracts falling for a sixth day. The prospect of more aggressive interest-rate hikes from the Fed to quell inflation have kept a lid on prices, despite increasing evidence of a robust recovery in China following the end of Covid Zero. Crude futures decline with WTI down 0.6% to trade around $75.89, off session lows. Spot gold rose to $1,840.

Looking to the day ahead. In terms of data releases, we have the German February ifo survey which came in stronger than expected, and the France February business and manufacturing confidence indicators; in the US. the latest MBA mortgage applications dropped -13.3%, following last week’s -7.7% slide. For central banks, first and foremost we have the release of the Fed’s FOMC minutes, and we will also hear from the Fed’s Williams. Finally, we will have earnings releases from NVIDIA, TJX, Pioneer and eBay.

Market Snapshot

• S&P 500 futures little changed at 4,004.75
• STOXX Europe 600 down 0.9% to 459.50
• MXAP down 1.3% to 160.19
• MXAPJ down 1.3% to 521.69
• Nikkei down 1.3% to 27,104.32
• Topix down 1.1% to 1,975.25
• Hang Seng Index down 0.5% to 20,423.84
• Shanghai Composite down 0.5% to 3,291.15
• Sensex down 1.5% to 59,790.65
• Australia S&P/ASX 200 down 0.3% to 7,314.50
• Kospi down 1.7% to 2,417.68
• German 10Y yield little changed at 2.56%
• Euro little changed at $1.0643
• Brent Futures down 1.1% to $82.13/bbl
• Gold spot down 0.1% to $1,834.10
• U.S. Dollar Index little changed at 104.26

Top Overnight News

1. Japan’s 10-year government bond yield on Wednesday breached the top end of the Bank of Japan’s policy band for a second straight session, prompting the central bank to step into the market with emergency bond buying and offering of loans. RTRS
2. Two of Japan’s biggest automakers (Toyota & Honda) agreed to the biggest wage hikes in decades in an early sign of momentum in annual pay negotiations as the central bank looks for evidence of a wage-price cycle that could lead to policy change. BBG
3. Chinese authorities have urged state-owned firms to phase out using the four biggest international accounting firms, signaling continued concerns about data security even after Beijing reached a landmark deal to allow US audit inspections on hundreds of Chinese firms listed in New York. BBG
4. Missing Chinese investment banker Bao Fan was preparing to move some of his fortune from China and Hong Kong to Singapore in the months leading up to his disappearance, according to four people with knowledge of his plans. FT
5. Investors increase bets on ECB lifting rates to all-time high. Buoyant service sector and wages fuel expectations of further rises in eurozone borrowing costs. FT
6. The Fed minutes may show how many officials pushed for a larger hike and whether they saw the need to take rates higher than anticipated. Markets expect tightening to be extended after stronger economic data and some hawkish messaging, with rates peaking at 5.36% this year. The RBNZ slowed its pace with a 50-bp increase to 4.75% after mulling another move of 75 bps. The projection for peak rates was left unchanged at 5.5%, over a slightly longer timeframe. BBG
7. Authorities accused crypto trader Avi Eisenberg of manipulating token prices on an exchange. Mr. Eisenberg countered, saying he did only what was permitted by the exchange’s software code. At the core of this case is the idea held by some crypto enthusiasts that “code is king.” WSJ
8. In the hunt for Lael Brainard’s successor, the White House is “focusing in” on Harvard University professor Karen Dynan, Northwestern University finance professor Janice Eberly and Morgan Stanley Chief Global Economist Seth Carpenter. BBG
9. JPMorgan cut staff access to ChatGPT, a person familiar said, confirming an earlier Telegraph report. The move wasn’t triggered by any specific incident. BBG
10. Consistent with the increase in leverage, demonstrated hedge fund equity market exposures have begun to rise from the extremely low levels registered late last year. Hedge funds exhibited exceptionally low betas to the equity market in 2022, reaching levels only matched during the last 20 years in 2009. Betas have rebounded in the last few weeks, driven in part by increased net length, but remain well below historical averages. GIR

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks were subdued after the declines on Wall St where the major indices were pressured on return from holiday as strong PMI data from Europe and the US spurred hawkish central bank repricing. ASX 200 briefly dipped below 7,300 amid a slew of earnings releases although clawed back most of its losses after weak data releases including a surprise contraction in Construction Work and softer-than-expected Wage Price Index, which removes some of the hawkish impulses for the RBA. Nikkei 225 underperformed and approached closer to testing the 27,000 level to the downside. Hang Seng and Shanghai Comp. conformed to the subdued mood in which weakness in tech briefly pulled the Hong Kong benchmark into correction territory although losses were then pared after the budget announcement which included a giveaway of HKD 5,000 in consumption vouchers and a cut to salary taxes, while there was also strength in HSBC and Hang Seng Bank post-earnings.

Top Asian News

• Hong Kong Finance Secretary Chan delivered the Budget and confirmed the government will provide HKD 5k in consumption vouchers to residents aged 18 years old and above, while they will reduce salaries tax with a ceiling of HKD 6,000 which will benefit 1.9mln taxpayers and lower government revenue by HKD 8.5bln. Chan also noted that the city is at the beginning of a recovery and that GDP contracted by 3.5% in 2022, although the government expects Hong Kong GDP growth of 3.5%-5.5% in 2023.
• China’s top diplomat Wang Yi met with Russia’s security chief and said the two sides discussed their willingness to oppose all forms of unilateral bullying and discussed ways to improve global governance. Furthermore, the two sides believe peace and stability in the Asia-Pac region should be resolutely upheld and they oppose the introduction of a cold war mentality, according to Reuters.
• RBNZ hiked the OCR by 50bps to 4.75%, as expected, while it maintained its view for rates to peak at 5.50% and considered hikes of 50bps and 75bps at the meeting. RBNZ stated that although there are early signs of price pressure easing, core consumer inflation remains too high and the Committee agreed it must continue to raise the OCR to return inflation to the target and to fulfil its remit.

European bourses are softer across the board, Euro Stoxx 50 -0.8%, as hawkish price action remains in full swing. Sectors are lower across the board ex-Media following individual earning updates, while Basic Resources lag as underlying commodities are dented. Stateside, futures are flat/negative with the ES holding around the 4k mark having briefly and incrementally dipped below the figure in European trade.

Top European News

• ECB’s Villeroy reiterates that there is excessive volatility of the market view on the terminal rate. Already in restrictive territory with a 2.5% rate, ECB is not obliged to hike at every meeting to September, via Les Echos. Remarks which echo his commentary from last Friday.
• UK PM Sunak reportedly secured the backing of two key Brexiteers for the Northern Ireland trade deal with Heaton-Harris and Braverman getting behind the outline agreement, according to FT.
• DUP’s Donaldson reportedly told an ERG meeting on Tuesday that UK PM Sunak was just halfway to meeting the DUP’s seven tests re. N. Ireland Protocol, having made progress towards three or four of them, via Politico citing sources; added that progress towards the remaining DUP tests is critical, telling PM Sunak to abandon the “arbitrary deadline” of April 10th.

FX

• The DXY remains underpinned on haven dynamics and as yields continue to climb across the board, index continues to climb above a 104.00 base with the current high at 104.33
• As such, peers are generally softer across the board with the AUD lagging post-data and as the NZD clings onto gains following the hawkish RBNZ announcement; AUD around 0.6810 and NZD near 0.6210 vs USD.
• EUR was generally unreactive to the morning’s Ifo data while dovish commentary from Villeroy prompted some pressure, but this was brief and limited given his remarks are a repeat of Friday’s, EUR/USD at the lower-end of 1.0630-1.0663 parameters.
• JPY and CHF are rangy and narrowly mixed against the USD, after the JPY regrouped on some convergence in JGB-UST yields irrespective of BoJ buying while CHF shrugged off an upbeat domestic investor survey.
• GBP is giving back some of Tuesday’s marked upside, with caution around N. Ireland Protocol progress perhaps weighing though the focus is firmly on BoE-related dynamics; Cable around 20 pips shy of 1.21 though off worst.
• EUR/SEK continues to test 11.00 with Riksbank’s Thedeen assisting while the ZAR is a touch softer heading into the budget announcement from 12:00BST/07:00ET onwards.
• PBoC set USD/CNY mid-point at 6.8759 vs exp. 6.8776 (prev. 6.8557)
• Yonhap reports that as USD/KRW soared “the foreign exchange authorities called an emergency market situation inspection meeting this afternoon.”.
• Riksbank’s Thedeen says inflation is far too high; January’s inflation data was a negative surprise, it is worrying.

Fixed Income

• EGBs have experienced a modest bounce in the wake of well-received EZ & UK supply, with Bunds now back to 104.00 from the new 133.63 YTD low and Gilts firmly above 101.00 in a similar fashion.
• Prior to this, the complex had been under marked pressure in a continuation of recent hawkish price action with the German 10yr yield as high as 2.57%; though, pre-supply this eased following a rerun of recent dovish remarks from Villeroy.
• Stateside, USTs have been moving in-tandem with EGBs with specific catalysts thin ahead of FOMC minutes and a 5yr sale, as such USTs are flat within 110.30+ to 111.08 parameters.

Commodities

• Crude benchmarks remain underpressure with specific developments limited and focus on the broader risk tone; WTI & Brent Apr at the lower end of USD 74.96-76.55/bbl and USD 81.70-83.25/bbl intraday parameters respectively.
• Nat Gas futures are mixed, though remain pressured vs recent levels as desks continue to cite relatively mild weather in the US and Europe.
• Kazakhstan may send the first batch of oil to Germany in the coming days which could possibly occur today, according to RIA citing the Energy Minister.
• Morgan Stanley sees Brent trading in a USD 90-100bbl range in H2 vs. its prev. view of USD 100-110bbl; raises estimate for oil demand growth to 1.9mln BPD from 1.4mln BPD.
• Nigeria raises March Bonny Crude OSP to +0.95/bbl vs dated Brent; Qua Iboe raise to +1.27/bbl vs dated Brent.
• Spot gold is little changed as any haven allure is offset by the USD’s strength, while base metals are lower given the tone and with focus on commentary from Rio Tinto overnight.
• Ukraine could export a total of 8mln tonnes of agricultural good a month for Odesa and Mykolaiv ports; will talk to UN to extend the grain deal for another year, according to Ukrainian Deputy Minister.

Geopolitics

• Russia reportedly conducted an ICBM test when US President Biden was recently in Ukraine although the test was said to have failed, while an official stated that Russia notified the US in advance of the launch through deconfliction lines, according to CNN.
• Russian PM Medvedev says Russia is ready to defend itself with any weapon, including nuclear.
• Russian Foreign Minister Lavrov says relations between Moscow and Beijing are developing despite the tense international situation; China’s Top Diplomat says we continue to maintain close communication with Russia, via Sky News Arabia. Subsequently, Russian Kremlin says President Putin is to meet with China’s Top Diplomat Wang Yi on Wednesday (as touted).
• US President Biden’s administration is expected to impose fresh sanctions on about 200 Russian individuals and entities this week, according to WSJ citing sources.
• North Korea could fire ICBMs at a normal angle and conduct its seventh nuclear test this year, according to South Korean lawmakers citing intelligence officials.

US Event Calendar

• 07:00: Feb. MBA Mortgage Applications, prior -7.7%
• 14:00: Feb. FOMC Meeting Minutes
• 17:30: Fed’s Williams Discusses Inflation

DB’s Jim Reid concludes the overnight wrap

I’m still in a bit of a state of shock this morning after the Liverpool / Real Madrid game last night. From wild jubilation to the end of the world within an hour. A Bit like financial markets in the last three weeks.

Back before the game when there was still hope in my heart, I released my latest monthly chart book, “Waiting for the lag” that debates the themes around the near-term improvement in the global outlook versus that of the lag of monetary policy. At this stage of a normal hiking cycle, we show that markets and economies are usually fairly benign so don’t confuse recent strength in data as a soft landing. It’s not until year 2 onwards of the hiking cycle that pain normally starts to be felt. So the real test will be when the lag of monetary policy fully kicks in as it should do over the next few quarters. By March, the ECB will have likely hiked +350bps in 8 months and the Fed +475bps in 12 months. More hikes are likely to come too.

Indeed our European economists yesterday lifted our ECB terminal rate call from 3.25% to 3.75% (more below). Until all these hikes on both sides of the Atlantic fully pass through the economy it is impossible to sound the all clear. We’ve always thought the first few months of the year would be positive with the problems building by year-end, but the extent of the rally in January made us shift back to neutral in credit quicker than we thought we would. Indeed, we think US credit has now passed the tights of the year. See the chart book here for much more.

The skinny in markets today is that the week has sprung into action over the last 24 hours after the US holiday on Monday, as a run of better than expected flash global PMIs led to a sizeable global bond sell off (10yr USTs +13.8bps), with the S&P 500 (-2.00%) wiping out its February gains. More on markets later but while we wait for the full lag of policy, the flash PMIs continued to improve yesterday from what were quite stressed levels. Indeed the US composite PMI rose back into expansionary territory at 50.2 (vs 47.5 expected). Much of the strength originated from a strong performance in services, which surprised to the upside at 50.5 (vs 47.3 expected). There was less evidence of a similarly strong improvement in manufacturing as it modestly surprised to the upside at 47.8 (vs 47.2 expected). As we dug into the weeds of the data release, it is clear that whilst input costs rose at a softer pace in February, there was a sharper rise in private sector output charges at both manufacturing and service sector firms. This comes as the pace of increase in selling prices was the quickest it has been since October, as firms reportedly passed through these increases as costs to their customers. This increased the chatter on inflation being sticky. The immaculate disinflation story has had some big blows in the last 2-3 weeks.

Markets subsequently moved to price in bets that the Fed will need to keep rates higher for longer, as expectations for the terminal rate for July’s meeting increased by 6.2bps to 5.367%. However, the increase was most evident for December’s meeting, with rate expectations for year-end increasing by 12.5bps to 5.19% since Friday’s close.

With uncertainty over terminal back on the agenda, the S&P 500 fell back -2.00% in its largest down move since the day after the December FOMC meeting and erasing its February gains. It was a broad based decline for US equities with every industry group lower on the day as over 93% of index members declined. The NASDAQ retreated further, down -2.50% at the close – also its biggest downside move since December 15. In US fixed income markets, the 10yr US Treasury yield spiked up by +13.8bps to reach its highest level since the second week of November at 3.945%. The 2yr Treasury also saw large moves, as yields rose +10.6bps to 4.723%, the highest level since July 2007. All eyes will be on the release of the Fed’s minutes today, as markets look for guidance on policy going forward. However it’s likely to feel a bit dated as a lot has happened in the subsequent three weeks.

Over to the other side of the Atlantic, the European PMI releases fitted in with the global pattern of improving services, but limited improvement from manufacturing. The EA services PMI came in above expectations at 53 (vs 51 expected). On the other hand, we had a downward surprise with the manufacturing release which fell to 48.5 (vs 49.3 expected). Resultingly, the composite PMI rose to 52.3 (vs 50.7 expected) and into expansionary territory. Against this backdrop, markets have moved to price in +126bps of rate hikes until hitting terminal at the October meeting (3.658%), up +6.4bps yesterday.

As stated near the top, our European economists yesterday lifted their ECB terminal rate call from 3.25% to 3.75%. They had previously expected a 50bp hike in March and a final 25bp in May. Now the baseline is for 50bp hikes at both the March and May meetings followed by a final hike of 25bp in June. See their note here for why a robust European economy and labour market along with hawkish ECB commentary have caused them to upgrade their call. They also explain why the heightened uncertainties make risks fairly balanced for a terminal landing zone between 3.50-4.00%.

Narrowing in, the German composite PMI also beat consensus, rising into mildly expansionary territory to 51.1 (vs 50.3 expected). This strong performance largely came from services, which rose to 51.3 (vs 51 expected), whilst manufacturing surprised to the downside at 46.5 (vs 48.1 expected). These releases affirm our expectation that Germany will have a shallow technical recession over the winter half year. For a bit more colour, look at the new Germany: Economic Chartbook from our Frankfurt team for all things Germany related. The beat in German composite PMI also reflects a rosier outlook for the German economy following a warm winter (here), and a significant drop in wholesale gas prices and favourable gas storage levels. Indeed, our German economists confirm the view that they’ll be no gas supply crunch for the country for this winter nor for winter 23/24. See their latest and final European Gas monitor here. Final due to the fact that the supply issue has now been covered. Yesterday, European natural gas futures sat below €50 at €48.54/contract, down -2.67%.

France’s PMI’s largely mirrored the broader Euro Area release, with the manufacturing surprising to the downside at 47.9 (vs 51 expected), and services to the upside at 52.8 (vs 49.8 expected). The overall composite PMI rose into expansionary territory to 51.6 (vs. 49.8 expected). Off the back of these upward surprises and expectations of larger rate hikes by the ECB, the 10yr bund yield rose +6.5bps to 2.529%, reaching their highest level since the end of 2022. The policy sensitive 2yr bund also rose by +5.1bps yesterday. The STOXX 600 modestly fell back -0.19%.

This morning in Asia equity markets are tracking the US falls with the KOSPI (-1.46%) emerging as the biggest underperformer followed by the Nikkei (-1.30%), the CSI (-0.56%) and the Shanghai Composite (-0.25%). Meanwhile, the Hang Seng (+0.03%) is just above flat after opening lower. In overnight trading, US stock futures tied to the S&P 500 (+0.19%) and NASDAQ 100 (+0.28%) are inching higher.

Early morning data showed that Japan’s producer prices index (PPI) rose +1.6% y/y in January, inline with market expectations and slightly higher than December’s increase of +1.5%. Elsewhere, Australia’s wage price index (WPI) for the final three months of 2022 rose +3.3% (+3.5% expected) from an upwardly revised +3.2% in the September quarter, thus slightly easing the RBA’s rate hike concerns.

In terms of monetary policy action, the Reserve Bank of New Zealand (RBNZ) hiked interest rates by +50bps (as expected) to a more than 14-year high of 4.75% while highlighting that rates could still rise as inflation remains too high. Following the decision, the New Zealand dollar rose as high as $0.6246, reflecting the hawkishness of the statement before settling to trade at $0.6224 (+0.03%) as we go to press.

Back to yesterday, and the same PMI story reverberated in the UK as the composite PMI came firmly in above expectations at 53 (vs 49 expected). There was a big jump in services, which rose to 53.3 (vs 49.2 expected). Manufacturing saw a stronger beat than over in the Continent, with UK manufacturing PMI surprising to the upside at 49.2 (vs 47.5 expected). With concerns over inflations still at large, 2yr and 10yr Gilts rose +16.3bps and +14.3bps respectively.

Aside from the rush of the global flash PMIs, we had further developments in the geopolitical space yesterday, as Bloomberg reported that President Putin announced Russia was suspending (but not exiting) its participation in the New Start Treaty, a significant shift in its policy. The Treaty limited each signatory to no more than 1,550 deployed nuclear warheads and 700 deployed long-range missiles and bombers and had been renewed for five years in 2021, as reported by Reuters. We also saw Russia’s Secretary of the Security Council Patrushev meet with China’s Director of Central Commission for Foreign Affairs Wang Yi in Moscow. Yi had previously met on less than amicable terms with US Secretary of the State Blinken last weekend. President Biden reiterated NATO’s resolve at a speech in Warsaw yesterday, saying “there should be no doubt: Our support for Ukraine will not waver, NATO will not be divided, and we will not tire.” This comes alongside the $480mn arms announcement made by the Biden administration in recent days.

Looking to other data releases, yesterday also saw the release of Germany’s February’s ZEW investor expectations index, which rose to 28.1 (vs 23 expected). We also had Canadian February CPI data, which decelerated to 5.9% year-on-year (vs 6.1% expected) – a rare recent positive inflation surprise.

To the day ahead. In terms of data releases, we have the German February ifo survey, and the France February business and manufacturing confidence indicators. For central banks, first and foremost we have the release of the Fed’s FOMC minutes, and we will also hear from the Fed’s Williams. Finally, we will have earnings releases from NVIDIA, TJX, Pioneer and eBay.