A look at the day ahead in U.S. and global markets from Mike Dolan
A relaxed Federal Reserve is nudging markets to a May rather than March interest rate cut even as regional bank stocks rumble again - and investors switch attention on Thursday to the Bank of England, three more megacap updates and U.S. jobs.
The takeaway from this week's Fed meeting is that rate cuts are coming, just not as soon as the most aggressive market bets.
"I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting," Fed boss Jerome Powell told reporters after the central bank held the policy rate in the current 5.25%-5.5% range but signalled cuts were coming this year after a ream of positive inflation news.
"Let's be honest, this is a good economy," Powell said.
The upshot is Fed futures have cut the chances of a March move to just 30% from 50%, but pencil in as much as 32 basis points for the May 1 meeting - or a quarter point cut with a 1-in-3 chance of a half point. Full year easing expectations actually rose to 145bps.
Yet markets haven't completely dismissed an early move yet as some softening of the labour market picture emerged in private sector payrolls and U.S. regional bank stocks plunged their most since the aftermath of last spring's mini-crisis.
Shares of Signature Bank's saviour, New York Community Bancorp, tumbled 37.7% on Wednesday after it posted a surprise loss and slashed its dividend, sending the KBW Regional Bank index sliding 6%.
Also, disappointed that this week's earnings from tech giants Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) didn't match sky-high expectations - and with Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Meta reporting later on Thursday, the S&P500 lost 1.6% in its worst day for four months.
Still, the main Wall St indexes closed out January in the black and futures were higher again ahead of Thursday's open.
And a combination of Fed signalling, the regional bank wobble, cooling job gains and this week's benign Treasury quarterly refunding schedule all saw Treasury borrowing rates swoon.
Ten-year Treasury yields plunged back below 4% to their lowest since Jan. 4, while two-year yields have now dropped some 13bps from Tuesday's close.
Overseas attention now turns to Thursday's Bank of England policy decision and monetary policy report, where the nine policymakers are expected to vote 8-1 to hold rates, and markets are more than 50% priced for a first rate cut by May too.
Encouraging thoughts of an earlier BoE move to aid the struggling UK economy was some rowback from finance minister Jeremy Hunt on the prospect of a big government tax cut in March.
Hunt said on Wednesday he did not expect the government to have the same kind of capacity to cut taxes during its upcoming budget in March as it did during the last budget in November.
With the European Central Bank now expected to be the first of the G3 central banks to ease in April - and with euro zone headline inflation ticking further below 3% last month - the euro fell to its lowest since mid-December.
The dollar index was higher more generally.
Ailing Chinese stocks held steady as government officials said they will maintain fiscal expansion this year to spur an economic recovery, reinforcing market views that public spending will be the Beijing government's main tool to lift growth.
But geopolitical anxiety continued in the background.
The United States added more than a dozen Chinese companies to a list created by the Defense Department which highlights entities that are alleged to work with Beijing's military, a U.S. official said on Wednesday.
Elsewhere in the earnings season, European banks fell 1.5%, led by an 8.2% drop in BNP Paribas (EPA:BNPP) after the French lender missed quarterly earnings expectations.
Deutsche Bank (ETR:DBKGn) was an outlier, up 4.8%, as the German lender announced plans to cut 3,500 jobs, initiate share buyback and pay dividends.
Key diary items that may provide direction to U.S. markets later on Thursday:
* Bank of England policy decision, Monetary Policy Report, Press conference. European Central Bank chief economist Philip Lane speaks
* U.S. corporate earnings: Apple, Amazon, Meta, Merck, Clorox, Eastman Chemical, Honeywell (NASDAQ:HON), Illinois Tool Works (NYSE:ITW), Huntington Ingalls, Hologic, Gen Digital, Eaton (NYSE:ETN), International Paper, Camden Property, Hartford, Microchip Technology (NASDAQ:MCHP), Royal Caribbean Cruises, CMS Energy (NYSE:CMS), Stanley Black & Decker (NYSE:SWK), Dover, Altria (NYSE:MO) etc
* U.S. Jan Challenger layoffs, weekly jobless claims, Q4 labour costs and productivity, final Jan U.S. manufacturing surveys from ISM and S&PGlobal
(By Mike Dolan, editing by Mark Heinrich mike.dolan@thomsonreuters.com)