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Nasdaq leads rally on Wall Street
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Real estate top of S&P 500 sectors, financials sole loser
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STOXX 600 closes up 1.03%
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Crude, gold up; bitcoin, dollar weaken
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10-year Treasury yield down at ~3.55%
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HOT INFLATION MAKE THIS TIME DIFFERENT (1330 EDT/1730 GMT)
In stark contrast to the past 25 years when core inflation in the Group of Seven nations never exceeded 2%, it has now peaked at 5.5%, making this time different, says Deutsche Bank.
There are significant implications that lead to five key takeways, Deutsche Bank says in its fixed-income blog.
Unlike the past 25 years, a hard landing should be the base case, a bigger growth shock is required for the major central banks to ease policy, the easing cycle should be deeper, "risk parity" is on shaky grounds and inflation is well above target.
Further, Deutsche Bank says it is unlikely that monetary policy can be implemented with enough precision to bring inflation back to target without generating a recession.
If inflation runs significantly above target, there should be a "longer fuse" between slowing growth and a central bank pivot, and central banks will presumably need to adopt a more restrictive policy than in the most recent tightening cycles.
The concept of risk parity rests on bonds being a good hedge for equities. But when high inflation becomes an issue, a positive shock to inflation coincides with a negative shock to growth, leading to higher bond yields and lower equities.
There is scope for a significant rotation out of foreign bonds and into JGBs by domestic investors. This should drive global term premia higher.
STOP ME IF YOU'VE HEARD THIS: JOBLESS CLAIMS, GDP (1145 EDT/1545 GMT)
Data released on Tuesday sang a cover of that old duet about a tight labor market despite nascent signs of economic softening.
The number of U.S. workers filling out first-time applications for unemployment benefits inched up 3.7% last week to 198,000, landing a hair to the north of the 196,000 consensus, according to the Labor Department.
Despite growing list of high-profile layoff announcements from the tech-plus sectors, and the I-can't-believe-it's-a-crisis in the regional banking space, the jobs market remains tight - a frustrating notion for the Federal Reserve, which views this tightness as an inflation driver.
"The number of initial claims remained in line with pre-pandemic levels, signaling continued strong demand for jobs in March despite concerns about the banking sector during the month," writes Sam Millette, fixed income strategist at Commonwealth Financial Network.
"Economists expect to see continued strong job growth when the March employment report is released next week, and further job market strength would likely support Fed plans to keep monetary policy restrictive at their next meeting in early May."
Of the 13 weeks of 2023 year-to-date, all but two showed fewer than 200,000 initial claims, a level associated with healthy labor market churn.
Still, a 1% uptick in the four-week moving average of initial claims - which irons out weekly volatility - suggests a move in the right direction.
Ongoing claims, reported on a one-week lag, also took a nominal 0.2% baby step upward to 1.689 million, nudging a bit closer to the 1.7 million pre-pandemic level.
Next, gather around for a bit of ancient history.
The Commerce Department unveiled its third and final take on GDP for the long-ago era called the fourth quarter.
The number was revised down 10 basis points to a still-respectable 2.6% on a quarterly annualized basis.
Private inventories, consumer expenditures, government spending and imports were the main drivers to the upside.
"Our base case is that the lagged and cumulative effects of restrictive policy will keep the economy growing at a below potential pace over coming quarters," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "But we see downside risk from lending activity resulting from recent bank failures, which could have an impact on business hiring and investment decisions and economic activity more broadly."
The more worrisome aspect of the report is the 0.4 percentage cut to consumer spending growth, to 1.0% from 1.4%, suggesting significantly softer demand than originally reported.
Consumer spending added 0.7 percentage points to the headline number, with expenditures on services accounting for the majority of that contribution.
"That retrenchment undoubtedly reflected the impact of rising prices, but also the normalization of spending after the stimulus-fueled buying binge on stuff that corresponded with limited mobility during lockdowns in 2020 and 2021," says Jim Baird, CIO at Plante Moran Financial Advisors.
"Notably, that marked the slowest quarterly increase in consumption since the recovery began in mid-2020."
Market participants will get a clearer picture regarding consumer behavior with tomorrow's broad-ranging Personal Consumption Expenditures (PCE) report, with will show income, expenditures, the saving rate and perhaps most compellingly, the PCE price index.
Wall Street appeared to be on track to extend Wednesday's rally, with Apple, Amazon.com and Microsoft again doing the heavy lifting.
(Stephen Culp)
WALL STREET RALLIES IN SEA OF GREEN (1015 EDT/1415 GMT)
Wall Street is all systems go on Thursday after jobless claims show layoffs remain low and the labor market is extremely tight, suggesting the U.S. economy can withstand high interest rates.
Real estate led 10 of all 11 the S&P 500 sectors higher, as the beaten-down sector bounces almost 6% off five-month lows hit last Friday. Communications services was the sole declining sector.
Semiconductors, struggling through its worst downturn in the last 13 years, also rose as did small caps and Dow transports. Value outpaced gains in growth stocks in a market awash in green.
But the market may be discounting the harm from tighter credit markets as the Fed keeps monetary policy tight.
While difficult to assess how long the banking crisis will linger, elevated funding costs and tighter lending standards ahead present the potential for a serious shock, says Torsten Slok, chief economist at Apollo Global Management.
"The bottom line is that if the ongoing banking crisis results in tighter bank lending standards over the coming quarters, it increases the risks of a harder landing," Slok said in a note.
Here is a snapshot of market prices in early trading:
(Herbert Lash)
WAITING FOR A CHINA REBOUND? HOW ABOUT GOLD? (GMT 1325)
Though investors have put their hopes in the recovery of industrial activities in China, global concerns might make them look for a haven in precious metals instead.
According to Berenberg analysts, early signs of the long-awaited China rebound indicate it "will not be particularly stellar, offering only modest growth." Thus, rather than waiting for Godot from the East, investors could turn their attention to "well supported" gold, for instance.
As the banking sector has been shaken by collapses and overall uncertainty, and global GDP is likely to slow in Q2, offsetting any potential gains from China, and gold might get a boost from a possibly more dovish Fed, Berenberg says.
"In the near term, we believe that an overweight precious metals strategy is merited due to ongoing geopolitical concerns and risks in the banking sector."
This being the case, the broker recommends gold-oriented stocks in its analysis, such as Greatland Gold, Endeavour Mining and Pan African Resources.
While Berenberg also highlights Boliden, which is mostly copper-focused, as a "top-quality operator," it notes that the Swedish miner should generate 14% of its 2023 revenue from gold.
WATCH THE TAPE, THE TWO-YEAR, AND NOT THE FED (0915 EDT/1115 GMT)
Yields on two-year Treasury note rose after jobless claims remained low on Thursday as tighter credit conditions have yet to show a material impact on the strong labor market.
The jump in yields suggests the market sees the Federal Reserve still hiking rates to slow growth when policymakers meet in May.
But investors should follow the markets, not the Fed for clues on when the central bank's rate hikes will end, says Richard Saperstein, chief investment officer at Treasury Partners in New York.
It may be possible that the Fed raises rates by another 25 basis points when policymakers end their meeting on May 3, as many in the market believe, Saperstein says.
But the two-year note's yield has moved below the fed funds rate, which historically signals that the Fed is near the end of its rate hiking cycle and the fed funds rate is near its peak.
Meanwhile, futures pointed to a higher open after initial claims for state unemployment benefits increased 7,000 to a seasonally adjusted 198,000 for the week ended March 25, the Labor Department said on Thursday. Economists polled by Reuters had forecast 196,000 claims for the latest week.
