Wall Street Futures Up
Wall Street is expected to see a positive start to the day’s trading as the US employment market reports stronger-than-anticipated growth, and wage growth slows down, boosting the Federal Bank’s confidence in raising interest rates by only 0.25% this month. The yield on American government bonds continues to fall, while the dollar weakens against major world currencies for the second day in a row. Investors are keeping a close watch on bank stocks following the crypto bank Silvergate Capital’s collapse and Silicon Valley Bank’s liquidity crisis, which caused the sharpest daily fall in bank stocks in almost three years.
Bond market gains
The American government bond market saw significant gains, with the yield on ten-year bonds falling by 15 basis points to 3.76%. The yield on two-year bonds, which are more responsive to short-term interest rate changes, has dropped by 21 basis points to 4.67%, after reaching its highest level since June 2007 earlier this week, when it surpassed 5%. The negative gap between ten-year and two-year yields has decreased to 0.91% after widening to over 1.1% earlier this week, marking the most significant reversal since September 1981, when Paul Volcker was the Federal Reserve chairman, and US interest rates stood at 19%.
Contracts suggest 0.5% Interest rate hike
The contracts on the federal interest rate, which reflect the market’s expectations of US interest rates, suggest a 41% probability of a 0.5% interest rate hike from the current level of 4.75% to 5.25% at the end of the Federal Bank’s upcoming meeting on March 22. This is a decline from the 68% chance predicted yesterday. According to CME data, contracts now indicate a 59% probability of a more modest rate hike of 0.25% in two weeks, compared to the 32% probability predicted on Thursday.
EU Aims to Secure Access to US Green Subsidies
Ursula von der Leyen, the President of the European Commission, is set to visit the White House on Friday to discuss trade in critical minerals with US officials. The EU hopes to secure better access for its companies to America’s green subsidies. The talks will also aim to build secure supply chains for electric vehicle batteries. EU officials want a deal that will make their supplies of raw and processed critical minerals eligible for the US Inflation Reduction Act’s generous tax credits. The Act aims to help reduce greenhouse gas emissions by providing tax credits for groups that source parts and materials from countries with which the US has a free trade agreement. However, the EU and Japan currently lack such agreements with the US.
US Economy to Show Resilience
In February, US hiring grew at a steady pace as employers added 311,000 jobs, although the unemployment rate increased to 3.6%. Despite this, recent economic figures point towards a thriving economy. Inflation firmed up while consumer spending saw a significant boost in January, and business activity picked up in February. The robust job market has been one of the biggest surprises in the economy, amid numerous twists and turns since the onset of the Covid-19 pandemic three years ago. Despite the Federal Reserve’s aggressive move to increase interest rates to curb inflation, many economists predicted a cooling or even loss of jobs by now. However, the job market remains strong.
ECB to Raise Rates Multiple Times
According to a Bloomberg survey of economists, the European Central Bank (ECB) will raise interest rates four more times to combat stubborn inflation and unwind its €5 trillion ($5.3 trillion) bond portfolio at a faster pace. Respondents anticipate three hikes of 25 basis points each to follow next week’s all-but-certain half-point move, which will bring the deposit rate to 3.75% in July. However, Goldman Sachs and Deutsche Bank predict that level will be reached in June. Morgan Stanley and Barclays expect a so-called terminal rate of 4%, matching money-market expectations, while JPMorgan and Citi believe the ECB will likely stop at 3.5%.
Turkey Announces Parliamentary Elections
Turkey’s President, Recep Tayyip Erdogan, has announced that parliamentary and presidential elections will take place on May 14th. The election will be challenging for Erdogan, given his government’s economic woes and slow response to last month’s devastating earthquake. Earlier this week, Kemal Kilicdaroglu was nominated as the presidential candidate for Turkey’s main opposition coalition.
UK Economy Grows by 0.3%
The UK’s economy grew by 0.3% in January, following a contraction of 0.5% in December. The services sector drove the surge, growing by 0.5%, although the manufacturing and construction industries slowed significantly. This news may allay fears of a recession, which the country narrowly avoided at the end of last year.
Iran and Saudi Arabia Restore Diplomatic Relations
Iran and Saudi Arabia have agreed to restore diplomatic relations, which is likely to ease tensions between two geopolitical rivals in the Persian Gulf, thereby reducing rattling in the oil markets. The deal, including commitments to reopen embassies within two months, was signed in China after days of negotiations between Ali Shamkhani, secretary of Iran’s Supreme National Security Council, and his Saudi counterpart. Saudi state-run media confirmed the agreement.