MARKET WRAPS
Watch For:
U.K. Halifax house price index, S&P Global/CIPS Construction PMI, Bank of England Decision Maker Panel data; Germany industrial production index; trading updates from Sberbank, Finnair, Babcock International Group, BMW, B&M European Value Retail
Opening Call:
Stocks may tread water, as focus among investors returns to recession concerns, ahead of the Easter holiday weekend. In Asia, stocks were broadly lower; the dollar gained; yields on U.S. Treasurys fell; oil and gold futures also declined.
Equities:
Stock futures point to a cautious open in Europe on Thursday as investors weigh U.S. data on private-sector employment and the services sector, while awaiting a March jobs report that will be released on Good Friday, a market holiday.
Marija Veitmane, head of equity research at State Street, said investors have shifted their attention away from March's banking turmoil and back to the risk of a recession that could drag down consumer spending and corporate profits.
"I'm in the camp that bad news is bad news," said Ms. Veitmane.
"This week, we're getting this realization that we're avoiding a banking crisis but economic fears are still there. We're going from financial crisis to cyclical slowdown."
"As the slowdown of the U.S. economy becomes more apparent, we think investors should prepare for a peak in interest rates by considering opportunities in bonds," said Mark Haefele, chief investment officer at UBS Global Wealth Management.
There's a risk that the Federal Reserve might have overtightened its monetary policy, with growing evidence that points to a potential recession, while the banking crisis is not over, noted Oanda.
"There are a lot of risks on the table."
However, Jeffrey Roach, chief economist for LPL Financial said he expected market volatility to dampen ahead.
"As the economy slows and inflation decelerates, the Fed will be in a better position to pause the current rate hiking campaign. As the economy recalibrates, investors should expect market volatility to dampen from here."
Traders will get another look at the health of the U.S. economy on Friday with the release of the widely watched payrolls report. U.S. equity markets will be closed, however, in observance of Good Friday.
Forex:
The dollar strengthened in Asia amid a risk-off mood triggered by weaker-than-expected U.S. economic data released Wednesday.
"Clearly, underlying risk aversion and latent demand for haven refuge" aren't over, said Mizuho Bank.
This is exemplified by USD's rebound despite lower Treasury yields, it added.
However, ING said the dollar was likely to weaken in the second half of the year as U.S. inflation and economic activity data decelerate and the Federal Reserve acknowledges these broad trends.
EUR/USD looks set to rise to 1.15 by year-end from 1.0924 currently, it said.
"The path to a weaker dollar will be a bumpy one and could easily get blown off course should banking stress return or other challenges emerge--such as a U.S. debt ceiling crisis in the third quarter."
A majority of respondents to a JPMorgan survey also expect U.S. dollar weakness to continue against at least some major currencies.
Twenty-three percent see broad dollar weakness continuing while 21% see softness vs. only G-10 haven currencies--the yen, Swiss franc and euro--and 12% see weakness vs. G-10 currencies but not emerging market ones.
Forty-four percent of respondents said they don't see dollar weakness persisting. The Fed has tightened enough according to 54% of survey takers, while 27% say it tightened too much and 19% say not enough.
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Sterling could benefit in the medium-term from a weaker dollar and reduced U.K. external vulnerabilities, Deutsche Bank said.
Low private-sector leverage should see sterling among the outperformers in a potential dollar downturn, the bank said.
"What's more, the latest current account data confirms our view that the U.K.'s external vulnerabilities are now much reduced."
Meanwhile, current positioning in sterling is far from a constraint from further GBP/USD gains, it said.
The risks to Deutsche Bank's GBP/USD forecasts of 1.25 for the second quarter and 1.28 for the fourth quarter are skewed to the upside, it added.
Bonds:
Treasury yields steadied after data showed the U.S. economy's private sector added fewer-than-expected jobs in March and reinforced recession fears.
"Our composite models suggest the economy was on track to fall into recession soon even before the impact of the banking turmoil feeds through. There also appears to be a lower, but rising, chance that a recession has already begun," said Andrew Hunter, deputy chief U.S. economist for Capital Economics.
"Our coincident recession tracking model now suggests a 46% chance that the recession has already started," Hunter said.
Fed funds futures traders see a 54.2% probability that the Fed will leave interest rates unchanged at between 4.75% and 5% on May 3, according to the CME FedWatch Tool.
In addition, traders see diminishing chances of further rate hikes after June, according to 30-day Fed Funds futures.
Energy:
Oil futures declined early Thursday as slowdown concerns gained traction.
Energy traders are digesting a round of U.S. data suggesting that the world's largest economy is headed toward a recession, Oanda said.
However, that is being offset somewhat by mildly bullish EIA crude-oil inventory data and by news that Saudi Arabia is reportedly set to raise oil prices for Asia customers, it added.
Oil markets have priced in the initial shock of the announced OPEC+ production cuts, but prices could continue higher "if demand surprises to the high side as we move into the summer. However, this is a massive if," said Troy Vincent, senior market analyst at DTN.
"These additional cuts mean that the market will be even tighter later in the year. As a result, we expect Brent to trade above $100 a barrel over the second half of 2023," said ING analysts.
They expect Brent to average $101 a barrel over the second half of the year and $104 a barrel over the fourth quarter.
Metals:
Gold prices were lower, pulling back from the record high levels earlier this month.
Many analysts have warned of profit taking risk in the near term due to the elevated price levels.
However, China Everbright Bank analysts reckoned the safe haven asset should remain well supported in the long run, given continued uncertainties over the banking sector's systematic risk.
Rising hopes for the end of the Fed's tightening cycle could offer an extra boost for gold prices, they added.
"With weak economic data fueling recession fears, this further stimulated appetite for safe-haven gold," said Lukman Otunuga, manager for market analysis at FXTM.
Gold has the "potential to test the 2020 high if the pending U.S. jobs report on Friday points to further signs of a weakening labor market," he said.
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Copper prices rose in a possible technical rebound after its Wednesday decline.
BofA Global Research analysts said that copper along with aluminum could rise into the end of the year.
For their next leg higher, the usual seasonal acceleration after the Lunar New Year holidays has to keep playing out and China's economy needs to continue strengthening, which should happen as the Covid-19 pandemic comes to an end, the analysts said.
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Chinese iron-ore futures were lower early Thursday.
Iron-ore prices continue to slip because of both demand concerns and policy-maker intervention, said Commonwealth Bank of Australia analyst Vivek Dhar.
"The risk of policy regulation and reduction of crude steel output disturbance has not receded, which continue to pressure the prices," Baocheng Futures analysts said.
China's NDRC has led the charge this year "to crack down on misinformation, hoarding and malicious speculation that typically result in higher iron-ore prices," including this week urging companies not to exaggerate price increases, Dhar said.
That is a weight on prices at a time when patchy China macro data is signaling an uneven economic recovery there, he said.
Spot iron ore fell by 0.5% Wednesday to $120.45/metric ton.
CBA tips a fall to $100/ton by later this year, projecting a cooling in Chinese steel demand.
TODAY'S TOP HEADLINES
China Caixin Services PMI Rises to Highest in Over Two Years
A private gauge of China's service sector activity rose to its highest level in 28 months in March, signaling a continued recovery after Beijing eased Covid-19 restrictions.
The Caixin China Services purchasing managers index rose to 57.8 in March from 55.0 in February, Caixin Media Co. and S&P Global said Thursday.
Bond-market's most deeply inverted gauge is pointing to 'large slowdown in economic growth' and 'deep recession'
The most deeply inverted part of the U.S. yield curve is one that hasn't sent a false signal about the prospects of a U.S. recession in more than a half-century of research.
That's the spread between 10-year and 3-month Treasury yields, which was around 155.8 basis points below zero as of Wednesday - reflecting a 3-month T-bill rate BX:TMUBMUSD03M that's trading well above its 10-year counterpart BX:TMUBMUSD10Y. The large difference between the two rates is pointing to the likelihood of a "deep recession," according to Campbell Harvey, the Duke University professor who pioneered the use of the spread as an indicator of future economic growth.
The biggest part of the U.S. economy slowed in March, ISM finds, as strains mount
The numbers: A bellwether of business conditions at U.S. companies fell to a three-month low of 51.2% in March and signaled slackening growth as strains mount on the economy.
The Institute for Supply Management's services index fell from 55.1% in February.
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04-06-23 0015ET
