© Reuters. US dollar banknotes are shown in this illustration taken on March 10, 2023. REUTERS/Dado Ruvic/Illustration
A look at the coming day in the US and global markets from Mike Dolan
As markets offloaded this year’s extraordinary rally in stocks of major technology companies on Thursday, the dollar posted its best day – and likely its best week – in more than two months.
After the first energetic day in financial markets in weeks, Friday’s return to calm suggests that the sudden surge in activity – the stock and bond market rebound and the dollar’s rally – was more of a reset than a rethink.
Many put the moves on traders jockeying for positions ahead of next week’s Federal Reserve meeting – which could lead to the last rate hike in the cycle. Another unexpectedly tight weekly reading from the US labor market has raised some lingering doubts that we are on the cusp of a “Fed peak” yet.
A disappointment with better-than-expectation earnings at Tesla (NASDAQ:) and Netflix (NASDAQ::) saw the supercharged FANG-plus index of the 10 leading tech and digital big stocks post its worst day in an otherwise stunning year so far — losing more than 4% as shares of Netflix and Tesla were nearly destroyed.
However, this indicator is still up 76% year to date.
Technological volatility sent the Nasdaq down 2%, its biggest drop since March. But the loss was a more modest 0.6% and the Dow Jones Industrial Average held on regardless, posting its ninth consecutive daily gain, helped by an optimistic Johnson & Johnson (NYSE: NYSE).
Moreover, Nasdaq and S&P500 futures rose again before the bell on Friday. He leads a quieter earnings schedule American Express (NYSE:) – But almost every other bank has been impressive over the past week.
Optimists point to a combination of continued job market strength and some rotation in sector stock holdings confirming “soft landing” hopes and representing a healthy expansion of what has been very narrow market gains so far this year.
Pessimists believe the Fed is not done tightening yet and any further interest rate hikes after next week will accelerate deflation in 2024. This has sparked a touch in the treasury market after two weeks of easing inflation.
Futures are fully priced in for a quarter-point rate hike next week, but indicated less than a 50-50 chance of another hike by November and a 75 basis point cut from the peak by this time next year. The two-year Treasury yield rose 12 basis points to 4.88% on Thursday, but has stabilized again at 4.85% since then.
Support in yields saw the dollar deliver its best performance since early May – further helped by growing doubts about other major central banks’ willingness to continue tightening interest rates once the Fed pauses.
The Bank of Japan is leaning toward keeping its yield control policy unchanged at next week’s policy meeting, according to Reuters sources, as policymakers prefer to scrutinize more data to ensure wages and inflation continue to rise.
With inflation exceeding the BoJ’s target for more than a year, markets have been simmering in speculation that the BoJ may adjust yield curve control as early as this month.
USD/JPY rose above 141 on Friday for the first time in 10 days.
Meanwhile, China’s markets remained in shambles, with concern growing about the lack of a major new catalyst for an economic recovery faltering as geopolitical tensions bite.
On Friday, authorities announced measures to boost consumption of cars and electronic items as part of a broader campaign to support the country’s ailing economy.
But all eyes are now on the Politburo’s annual meeting, which is expected to take place before the end of July, as China’s leaders chart a political course for the rest of the year.
Must-watch events on Friday:
* US corporate earnings: American Express, Huntington Bancshares (NASDAQ:), Schlumberger (NYSE:), Comerica (NYSE:), Region Financial (NYSE:), Roper Technologies (NYSE:), Interpublic,
* Canada Home Prices for June, Retail Sales for May
* US Treasury Secretary Janet Yellen speaks in Hanoi
(Writing by Mike Dolan; Editing by Angus McSwan; mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)