MARKET WRAPS
Watch For:
EU Labour Cost Index, Foreign Trade; Germany WPI; France CPI; BOE/Ipsos Inflation Attitudes Survey; updates from H&M, Ryanair
Opening Call:
Europe is poised for a steadier open following modest gains on Wall Street, although investors may struggle to find a firm footing following the market’s recent steep declines. In Asia, stocks were mostly higher, along with the dollar and Treasury yields; oil prices were mixed and gold extended its losses.
Equities:
European shares could edge higher on Thursday, recovering some stability after recent losses that were spurred by the U.S. inflation report.
On Wall Street, stocks ended slightly higher on Wednesday after swinging between gains and losses for much of the session, as data showed that costs for wholesale goods and services fell for the second month in a row.
“After yet another steep drop for the year, the market is fighting to rebound, but the spectre of more and bigger Fed rate hikes looms large once again,” IG said.
“This is still very much a tentative recovery, with investors edging back in.”
Swedish assets will likely be in the spotlight after the country’s prime minister conceded defeat following close-run national elections, handing a right-wing opposition bloc the first shot at forming a new government.
The victory was powered largely by support for the anti-immigration Sweden Democrats, a far-right group with roots in the neo-Nazi movement, which won its biggest-ever share of the vote.
Read more here.
Economic Insight:
The Fed is likely to make it clear that monetary policy will be restrictive for a prolonged period of time, Bank of America said, ahead of next week’s rate decision and quarterly outlook publication.
It expects a 75 basis point increase, even after Tuesday’s hot CPI data triggered some bets for a 100bps increase. But BofA said the window for a soft landing is narrowing and the FOMC is likely to cut growth forecasts.
“Participants are likely to mark down their expectations for growth this year, and carry forward some softness into 2023 on account of weaker momentum and expectations for a more restrictive monetary policy stance.”
Forex:
The dollar was steady in Asia after its sharp movements during the past two days.
“Investors and foreign exchange traders are trying to recover after getting resoundingly wrong-footed by the consumer price report,” Corpay said.
The dollar had weakened against its rivals “as positioning errors unwound and liquidity levels returned to normal.”
While reports of a Bank of Japan rate check has resulted in the yen making some decent gains, few expect this strength to persist unless there’s some real change in the BOJ’s underlying policy stance, ING said.
Goldman Sachs sees further scope for yen weakness in the near term, given its latest upward revisions to the Fed’s rate-increase path and it foreseeing upside risks to Treasury yields.
The bank’s standard foreign-exchange model suggests that if the 10-year Treasury yield rises to 4.5%, USD/JPY could rally by another 7% to nearly 155, all else being equal.
While the likelihood of Japan’s FX intervention looks low, an escalation in verbal intervention together with reported “rate checks” should raise the odds priced into markets.
Goldman Sachs remains comfortable with its 3-month USD/JPY forecast of 145.00.
Bonds:
Treasury yields moved slightly higher in Asia, as investors brace for even tighter monetary policy that may drive the U.S. economy into recession. The 2-year yield remains at its highest level since November 2007.
“That Treasury yields continue to inch higher suggests that the market sees inflation continuing to work its way into the economy, as the lagged effect of rate hikes continues,” LPL Financial said.
“A potential rail strike is also a concern, as it would create yet another supply challenge as goods, including grains and vehicles, are halted from being delivered by rail.”
Market chatter about a possible 100-basis point Fed hike next week continues, but investors are still betting more heavily on a 75bp rate increase.
Data due later Thursday include weekly jobless claims that are expected to accelerate to 225,000 from 222,000 in the previous week.
Energy:
Oil futures were little changed in Asia following Wednesday’s gains, with sentiment buoyed by speculation the Biden administration may consider refilling U.S. oil reserves at $80 a barrel.
That “supports a floor on prices at the $80 level,” Tyche Capital Advisors.
CBA said that with Iranian oil exports unlikely to rebound any time soon, given setbacks to the revival of the 2015 nuclear accord, “we continue to believe that oil markets will tighten by the end of the year, supporting our call for Brent to lift to $100/bbl in the fourth quarter.”
Metals:
Gold prices retreated into a third session thanks to the unexpected rise in U.S. inflation.
“Gold’s fate will be determined next week when policy makers decide if the Fed needs to be even more aggressive with fighting inflation,” OANDA said.
“Gold could be vulnerable to a tumble towards $1,650 and possibly much lower if the Fed signals more aggressive rate hikes remain on the table.”
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Copper futures were higher on signs of supply tightness.
ANZ said the futures curve in copper is in deep backwardation, where spot prices are higher than futures, signaling physical supplies remain tight.
However, investors are still worried about the global economic backdrop, noting that the U.S. inflation report has raised concerns that economic growth could be affected, especially in emerging-market countries.
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Cutbacks to refined zinc production because of high electricity costs should prevent a deep slump in prices for the industrial metal, Fitch said.
While it expects prices to weaken to an average $3,215/ton in September-December, versus an average $3,643/tonne in January-August, that “would leave prices high by historical standards.”
Fitch said prices are expected to be pressured lower by subdued demand, as higher energy costs, inflation and interest rates hit economic activity and, consequently, the need for zinc to galvanize steel.
TODAY’S TOP HEADLINES
China’s Central Bank Keeps Key Policy Rate Unchanged
China’s central bank kept its key policy rate unchanged on Thursday, a move that could put benchmark lending rates this month on hold after a cut in August.
The People’s Bank of China held the one-year interest rate of its medium-term lending facility at 2.75%, while injecting 400 billion yuan ($57.45 billion) of liquidity via the financial tool.
Amtrak to Suspend Long-Distance Services as U.S. Railroad Strike Looms
Amtrak said it would suspend all long-distance train services on Thursday to avoid disruptions from a potential strike by freight rail workers, as negotiations between railroads and labor unions approach a Friday deadline.
Amtrak’s long-distance trains operate on tracks owned and operated by freight railroads. The negotiations don’t involve Amtrak workers, but the company said it was suspending intercity trains that would not reach their destination before a potential strike. The suspensions don’t affect the Northeast Corridor or Acela services, it said.
Crypto Investors Step Up Bets Against Ether as ‘Merge’ Looms
Investors ramped up their bets against ether, the second-largest cryptocurrency, on the eve of the Ethereum network’s big software upgrade slated for early Thursday morning.
The cost of holding a short position-a bet that ether’s value will fall-in the perpetual futures market has risen ahead of the upgrade, a sign that investors are increasingly hedging their risk going into the network update. So-called funding rates for ether perpetual futures, a kind of futures contract that doesn’t have an expiry date, have been negative for more than a month, meaning that traders are paying a premium for pessimistic bets.
EU Seeks to Raise $140 Billion Clawing Back Energy Profits
BRUSSELS-The European Union outlined a plan to redistribute about $140 billion from energy companies to consumers and businesses in a bid to cushion the blow of high prices stoked by Russia’s punishing assault on the continent’s economy.
The plan is among the broadest defensive maneuvers that Brussels has orchestrated so far in response to economic pain Russia has inflicted on Europe in the standoff. Western powers have levied an array of sanctions against Russia to punish and deter Moscow amid its invasion of Ukraine.
Far-Right Party in Sweden Drives Opposition Bloc to Election Win
Sweden’s prime minister conceded defeat after close-run national elections, handing a right-wing opposition bloc the first shot at forming a new government.
The victory was powered largely by support for the anti-immigration Sweden Democrats, a far-right group with roots in the neo-Nazi movement, which won its biggest-ever share of the vote.
Write to paul.larkins@dowjones.com
Expected Major Events for Thursday
04:30/NED: Aug Unemployment
05:00/FIN: Jul Retail sales
06:00/GER: Aug WPI
06:00/NOR: Aug External trade in goods
06:45/FRA: Aug CPI
07:00/HUN: Jul Construction
08:00/POL: Jul Merchandise trade
08:00/POL: Aug CPI
08:30/UK: Aug Bank of England/Ipsos Inflation Attitudes Survey
09:00/EU: 2Q Labour Cost Index
09:00/EU: Jul Foreign trade
10:00/IRL: Jul Goods Exports and Imports
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Read More: EMEA Morning Briefing: Europe Set for Cautious Gains But Volatility to Continue