North American Morning Briefing: Equity Futures Rise, Focus on Bond Yields

MARKET ENVELOPES

To watch:

New Home Sales for July; Flash manufacturing PMI for August; Flash Services PMI for August; Richmond Fed Business Activity Survey for August; Federal Reserve Bank of Minneapolis President Neel Kashkari speaks at the Wharton Club of Minnesota event.

Opening call:

Equity futures rose slightly on Tuesday, signaling stocks were on track to make up lost ground after Monday saw the worst day for the market in months as investor sentiment was hammered by concerns over the global economic outlook and the likelihood of central bank policy tightening.

This week, Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole economic conference on Friday should bring more clarity to the market on the central bank’s policy path.

The recent selloff was partly driven by concerns that the Fed will not ease its aggressive monetary policy tightening – including the biggest interest rate hikes in decades – as it battles inflation. to 40-year highs.

“Yesterday was a sea of ​​red for risk assets and sovereign bonds as the energy crisis intensified in Europe, contributing to the specter of global central bank tightening already weighing on asset markets. said Tim Wessel, an analyst at Deutsche Bank.

“Looking ahead, US stock futures point to a slight rebound with the S&P 500 and NASDAQ 100 contracts moving higher.”

Bond yields remained in focus amid changing investor expectations regarding inflation and monetary policy.

The yield on the 2-year Treasury bill, which tries to predict the benchmark lending rate a few years from now, rose again on Monday to above 3.3%.

It remains well above the yield on the 10-year note – which was down slightly on Monday at 3.01% – in a phenomenon known as the inverted yield curve, which is an established indicator of a future recession.

Overseas, the pan-European Stoxx 600 was flat and Asian indices ended lower, taking inspiration from the earlier selloff on Wall Street.

Economic overview:

Barring a tangible recession, central banks in developed markets should continue to raise interest rates through inflation cuts, JPMorgan said.

“DM CB [developed market central banks] are unlikely to see the inflationary threat receded by lower commodity prices alone, and moderating recessionary risks actually warrant higher policy rates,” the bank said.

At the upcoming Jackson Hole symposium, to be held Thursday through Saturday, Fed Chairman Jerome Powell is expected to push back against the idea that a dovish policy pivot is coming soon, JPM said.

Forex:

The dollar hit two-decade highs against a basket of currencies and the euro on expectations that Fed Chairman Jerome Powell will signal further interest rate hikes on Friday and safe-haven demand then. that risk aversion is driving stock markets down, ING said.

At the same time, further increases in gasoline prices are worsening the outlook for countries outside the United States, particularly the euro zone, the Dutch bank said. “The dollar remained in good demand at the start of the week, benefiting from a rather ideal combination,” ING said.

Energy:

Oil prices edged higher after Saudi Arabia’s energy minister said OPEC+ could cut production amid “harmful volatility” in the market. Prince Abdulaziz bin Salman told Bloomberg that OPEC+ has “the commitment, the flexibility and the means” in its agreements to deal with market challenges, including cutting production “at any time and under different shapes”.

The minister was pointing to the disconnect between volatile and illiquid markets and underlying fundamentals, Deutsche Bank said. The comments halted recent declines in oil prices, which have fallen about 20% from June highs. The next OPEC meeting is scheduled for September 5.

Metals:

Copper was down ahead of Jerome Powell’s speech in Jackson Hole on Friday and is shaking around a gloomier macro picture.

Risk aversion sentiment and reports last week of higher inflation in Germany and Japan reinforced the weak global macroeconomic picture ahead of the key Fed meeting when Powell is expected to point to further rate hikes and comment on the inflation, RBC Capital Markets said.

China has also cut its benchmark lending rate in a bid to ease the housing crisis hitting consumption, RBC added.

Copper supply risks will remain high as production growth for 2022-2031 will shift to riskier countries, including Chile, the Democratic Republic of Congo and Argentina, Fitch Solutions said.

The company named the industrial metal, which is increasingly in demand due to the accelerating global energy transition, as a troublesome commodity due to a mix of historically high prices and expectations of a strong growth in demand.

“Despite the number of projects that exist on paper, significant barriers remain for investment in supply to keep pace with demand,” Fitch said.

“The growing disconnect between strategies focused on acquiring major miners will come under greater pressure due to lack of investment in supply.”

   
 
 
   
 
 

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(MORE TO BE FOLLOWED) Dow Jones Newswires

August 23, 2022 06:27 ET (10:27 GMT)

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James T. Quintero