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Main U.S. indexes gain, DJI up ~1%; bank stocks weak
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Utilities lead S&P 500 sector gainers; financials weakest
group
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Dollar, crude up; gold ~flat; bitcoin dips
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U.S. 10-Year Treasury yield jumps to ~4.06%
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U.S. STOCKS BOUNCE BACK, BUT BANKS LAG (1600 EST/2100 GMT)
U.S. stocks bounced back on Thursday as a Federal Reserve official said that he favors the U.S. central bank sticking with quarter-point rate increases, though concerns over the impact of higher rates on growth linger. Atlanta Fed President Raphael Bostic said that the impact of higher U.S. interest rates on the economy may only begin to "bite" in earnest this spring, an argument for the Federal Reserve to stick with "steady" increases.
Speculation has risen that the Fed could reaccelerate the pace of its hikes as inflation shows signs of perking up again and as other economic releases indicate a still tight labor market. Data on Thursday showed that the number of Americans filing new claims for unemployment benefits fell again last week, pointing to sustained labor market strength, while labor costs grew much faster than previously estimated in the fourth quarter. That provided another boost for Treasury yields, with the benchmark 10-year Treasury yield rising as high as 4.091%, the highest since November, while the two-year yield jumped to 4.944%, its highest since 2007. Of note, financials were one of two losing S&P 500 sectors, while banks were especially weak. The lost more than 1.5%. Here is Thursday’s closing market snapshot:
(Karen Brettell)
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WILL CHINA’S MANUFACTURING GROWTH LOWER INFLATION? (1335 EST/1835 GMT) Strong Chinese factory data on Wednesday raised fears that the country’s reopening will keep inflation pressures high, but that may not be the case. In fact, it may lower inflation as it adds to the glut of finished products, according to Brian Reynolds, chief market strategist at Reynolds Strategy. China's factory sector grew in February at the fastest pace in more than a decade. But “while this growth may push up the price of raw materials (which are a relatively small part of the global economy), it should lead to lower overall inflation because it would increase the glut of finished products,” Reynolds said in a report. He notes that China’s recovery is led by growing manufacturing output as factory owners make up for lost time, and that it should outpace consumption growth, meaning that much of the growth will be exported. China’s net exports are already close to an all-time high, and this year’s increase in output should help propel it to new highs. “That would result in the U.S. trade deficit growing, which would mechanically lower GDP. It would also likely lead to lower inflation, as U.S. firms are just starting to get their hands around the surge in inventories that ballooned last year in response to the supply chain issues,” Reynolds said.
(Karen Brettell)
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U.S. DEBT CEILING: WILL TREASURY SECRETARY YELLEN'S SPINNING PLATES WOBBLE AND FALL? (1224 EST/1724 GMT) Last month, the U.S. flirted with its $31.4 trillion debt ceiling, prompting the Treasury Department to invoke “extraordinary measures” to maintain the country’s solvency. According to Jack Ablin, chief investment officer and founding partner at Cresset, it is expected that the "Treasury will be able to kick the can down the road until sometime in July before Treasury Secretary Yellen’s spinning plates begin to wobble and fall." The question is, will Congress flirt dangerously with default, or will cooler heads prevail? Ablin says that only one in four current House members were seated in Congress during the 2011 fight, however, two players on today’s political stage were knee deep in the 2011 debt limit turmoil that resulted in the downgrade of U.S. Treasury debt – Joe Biden and Jerome Powell. Ablin notes that then-Vice President Biden led bipartisan efforts which paved the way to lifting the borrowing limit in exchange for federal spending cuts, while Fed Chairman Powell helped persuade Republican House members of the gravity of a debt default. Raising the 2011 debt limit, as Ablin recalls, came down to the wire, and not before nervous investors sold equities and bought up bonds and gold. In fact, between July and September, the 10-year Treasury yield plunged to 2% from 3% in the three months leading up to the deal, while the S&P 500 swooned nearly 18% before recovering. Gold, meanwhile, jumped from $1,500 to $1,900 as tensions flared. Chairman Powell will be heading to Capitol Hill next week where Ablin believes he will no doubt warn lawmakers who, like their 2011 predecessors, are angling for massive spending cuts, of the dangers of flirting with a debt default. Meanwhile, Ablin also believes President Biden understands the give and take of legislative negotiation. "We expect the President will concede to spending cuts this time, too. Remember, sovereign credit ratings are not just the result of a country’s ability to pay its debt, but its willingness to meet its financial obligations. We expect cooler heads will prevail."
(Terence Gabriel)
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ODD JOBS: DESPITE LAYOFFS, LABOR MARKET TOO TIGHT FOR FED'S COMFORT (1116 EST/1616 GMT) Data released on Tuesday reinforced the reality that the U.S. labor market remains tighter than twins.
The number of U.S. workers filling out first-time applications for unemployment benefits moved counter to expectations, dipping yet again to 190,000, marking the sixth consecutive week below the 200,000 level associated with healthy labor market churn.
With the jobless the lowest it's been since the moon landing, and nearly two unfilled positions for every unemployed worker, employers are reticent to hand out pink slips willy-nilly.
More concerning, at least for Powell & Co, is the extent to which the resulting upward pressure on wage growth will keep inflation (and restrictive rates) higher for longer. "Initial jobless claims continue to be subdued as layoffs economy-wide remain low, and the layoffs we do see in some sectors have yet to translate into a rise in new jobless claims," says Nancy Vanden Houten, lead U.S. economist at Oxford Economics (OE), who adds that the Fed is "on track to raise interest rates at the next three meetings." There has indeed been a spate of headline-grabbing layoff announcements from high profile tech and tech-related companies in recent months. Challenger Gray's most recent planned layoffs report showed announced job cuts jumped in January by 136% to 102,943 - 41% of which came from the technology sector - representing a 440% year-on-year increase. But the fact that those layoffs have yet to appear in claims data suggests, among other things, the recently sacked are snatching up new gigs with relative ease. "The disconnect between layoff announcements and jobless claims means that most workers who are losing jobs are finding new ones very quickly, since there are still big parts of the US economy struggling with labor shortages," writes Bill Adams, chief economist at Comerica Bank.
Ongoing claims , which is reported by Labor Department reports on a one-week lag, also unexpectedly inched nominally lower to 1.655 million, wafting well below the 1.7 million pre-pandemic level. In more ancient news, the cost of labor rose by much more than previously thought in the closing months of 2022. The Labor Department nearly tripled its initial take, to 3.2% from 1.1% at a quarterly annualized rate. Consensus called for a gentler upward revision, to 1.6%. A year-on-year breakdown of the data is illuminating. Unit labor costs were up 6.3% over Q4 2021, and hourly compensation up 4.4%. But adjusted for inflation, "real" hourly compensation dropped 2.4%.
Regarding productivity , nonfarm worker output rose by 3.1% while hours worked increased by 1.4% on quarterly annualized bases. Taken together, they translate into a 1.7% increase in worker output per hour, a slight improvement over the third quarter's 1.2% growth. "Taken together, the revised data suggest that the underlying inflation problem in the US is worse than previously thought," says OE's lead U.S. economist Michael Pearce. A week from tomorrow, the Labor Department's much anticipated February employment report is due. Analysts expect payrolls to have increased by 200,000 and the jobless rate to edge up to a still low 3.5%. Wall Street was mixed, with megacap momentum stocks dragging the S&P 500 and the Nasdaq into the red.
But the Dow was in positive territory, with an assist from surging Salesforce shares.
(Stephen Culp)
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NASDAQ DOWN AS YIELDS JUMP, TESLA DISAPPOINTS (0953 EST/1453 GMT) The Nasdaq Composite and S&P 500 dropped on Thursday as Treasury yields jumped after data showed that U.S. labor costs grew faster than initially thought in the fourth quarter, adding to concerns about a resurgence in inflation. Benchmark 10-year Treasury yields reached 4.083% after the data, the highest since November, while two-year yields hit 4.944%, the highest since 2007. Other data showed that the number of Americans filing new claims for unemployment fell again last week, pointing to sustained labor market strength that could keep the Federal Reserve raising interest rates. The prospect of the Fed hiking rates higher and holding them there for longer has dented risk appetite and sent stocks lower as investors worry about the impact on growth. Tesla Inc also weighed on the market after Chief Executive Elon Musk and team's four-hour presentation on Wednesday offered few details on its plan to unveil an affordable electric vehicle. The stock was last down 6%. The Nasdaq fell 0.6%, and the S&P 500 dipped 0.3%. The Dow Jones Industrial Average eked out gains or 0.2%. Here is Thursday’s opening market snapshot:
(Karen Brettell)
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U.S. 10-YEAR TREASURY YIELD MARCHES TO FRESH MULTI-MONTH
HIGHS (0900 EST/1400 GMT)
The U.S. 10-Year Treasury yield hit 4.083% on
Thursday, which is a fresh high back to early November. This
amid rising concerns that the Federal Reserve will need to
continue to raise rates and keep those rates higher for longer.
The yield is now on track to rise for a sixth-straight week:
With its latest push, the yield is forging above resistance
in the 3.95%-3.98% area which includes a weekly Gann Line and
the 23.6% Fibonacci retracement of the 1981-2020 yield bear
market.
This action can put traders on guard for the yield to challenge the 4.27%-4.3380% area. This zone includes another weekly Gann Line as well as the October 2022 high. The 4.3380% mark was the highest level since November 2007. The 4.3380% level protects against the potential for a further rise to the 5%+ area. The yield will need to close Friday back below 3.9490% to end the five-week win streak. Such a turn could then see the yield chop its way back down to the 3.55%-3.40% area as a number of weekly Gann Lines are providing yield support in this zone. The yield's mid-January trough was at 3.3210%.
(Terence Gabriel)
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
