Stocks and the dollar are falling ahead of a crucial few days

LONDON (Reuters) – Global markets experienced a rare calm on Thursday ahead of the release of US jobs data at the end of the week, which could easily spark more storms across assets.

European stock markets started to fall in part though there was little movement from the USD/FRX or in the bond markets as recession warnings became more acute again. /we

US Federal Reserve Chairman Jerome Powell stuck to his message of raising interest rates higher and possibly faster during a hearing on Wednesday, but also emphasized that the decision would depend on the strength of the data coming in.

This means that traders will look more closely at the US jobs data on Friday and then the US inflation figures following on Tuesday.

Financial markets are now pricing in nearly an 80% possibility of a 50 basis point rate hike at the Fed’s March meeting, up from around 30% at the start of the week. There is also growing speculation that the US central bank may push interest rates to 6%.

“Our fundamental view is that 5.5% will be sufficient, but they (the Fed) have to stay there longer than the market expects.” said Ian Cunningham, co-head of multi-asset growth and joint portfolio manager for the Ninety One Global Macro Allocation Fund.

“A recession in the US is our central scenario,” he said, adding that the fund was still significantly long on the dollar, especially against currencies such as the Canadian dollar and the British pound.

The US dollar index, which measures the greenback’s value against a basket of major currencies, hovered near a three-month high of 105.57. However, it lost 0.4% to the Japanese yen at 136.78 per dollar.

Japan’s lower house of Parliament on Thursday approved the government’s nominee Kazuo Ueda to be the next central bank governor, signing off on a new leadership that will be tasked with guiding an exit from ultra-loose monetary policy.

However, the Bank of Japan is expected to maintain what it calls yield curve control and ultra-low rates at its current chairman’s final meeting on Friday.

The 10-year government yield again hit the Bank of Japan’s policy ceiling of 0.5% on Thursday.

The dollar was also rebounding against the Canadian currency at C$1.3803, the highest level in nearly four months, thanks to a pessimistic Bank of Canada, which left interest rates on hold on Wednesday.

Meanwhile, the Chinese yuan weakened towards the key psychological level of 7 against the dollar after the slowest annual consumer price inflation data in a year raised doubts about the strength of the economic recovery.

Back to the eighties

Benchmark government bond markets remain the key driver of both interest rate expectations and the degree of pain that sharp hikes are likely to inflict on the global economy.

The two-year Treasury yield held near a 15-year high of 5.04%, while the 10-year yield held steady at 3.9953%.

Notably, the gap between yields on short-term 2-year Treasury bonds and longer-term 10-year bonds reached a negative 108.2 basis points. This was the most extreme reversal since 1981. Reversals are seen as reliable recession indicators.

Also in Europe, the German 2s10s curve was at its sharpest inflection point since 1992, with German 2-year returns at a post-2007 high of 3.35% and 10-year returns at 2.68%.

“Powell acknowledged that the March decision depends on the data,” said Thierry Weizmann, global currency and rate analyst at Macquarie. “Thus, the question before us is whether the economic acceleration in January was just a blip or a trend.”

An advance payroll warning meant that both the S&P 500 Futures and Nasdaq Futures contracts were 0.3% in the red. Indices also suffered on Wednesday after private payrolls beat consensus expectations and demand for home loans increased despite higher mortgage rates.

Forecasts for Friday’s headline numbers point to a modest payroll increase of 205K after the January jump of 517K prompted a reassessment of expectations for monetary tightening in January.

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 falling to $82.45 a barrel, US crude dropping to $76.39 a barrel, and global growth-sensitive metal copper down 1%. Gold was slightly higher at $1,817 an ounce.

Additional reporting by Stella Keogh in Sydney and Joyce Alves in London; Editing by Angus McSwan

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