Morning Bid: ECB set to ease as Fed delivers hawkish twist
By Mike Dolan, opens new tab, Editor-At-Large, Financial Industry and Financial Markets
As the Federal Reserve takes a hawkish turn in the face of another Wall Street swoon, the European Central Bank appears set to ease borrowing rates again - or at least that's what markets expect.
In today's column, I get into all the details and explain why the bond market doesn't appear to be too worried about U.S. long-term inflation. The answer may not be all good news.
I'll be off tomorrow, as the U.S. stock market will be closed for the Good Friday holiday, and then I'm on holiday next week. But 'Morning Bid' will be back on Tuesday, with all the markets coverage you're looking for from my Reuters colleagues.
Now onto the market news.
Today's Market Minute
* European shares were mixed on Thursday as investors parsed corporate earnings to gauge the fallout of U.S. President Donald Trump's erratic trade policies, while awaiting the European Central Bank's policy decision later in the day.
* Japan is "deeply concerned" over global economic fallout from U.S. President Donald Trump's trade tariffs, Finance Minister Katsunobu Kato said on Thursday in the government's strongest warning yet as the two nations began trade talks.
* U.S. President Donald Trump's desire for a stronger yen against the dollar is almost certain to figure into trade negotiations with Japan, but analysts say any effort to shift the currencies is fraught with risks for both sides.
* U.S. Federal Reserve Chair Jerome Powell said on Wednesday the Fed would wait for more data on the economy's direction before changing interest rates, but cautioned that President Donald Trump's tariff policies risked pushing inflation and employment further from the central bank's goals.
* Plans are afoot for an American-owned company seized by the Kremlin and placed under state control to be used to supply food to the Russian army, a document seen by Reuters showed, potentially threatening Moscow's warming relations with the U.S.
ECB set to ease as Fed delivers hawkish twist
The final trading day of a holiday-shortened week for U.S. markets is seeing stock futures reclaim some of Wednesday's steep tech-led losses. An earnings beat from Taiwan's TSMC (2330.TW), opens new tab, and its unchanged revenue growth outlook, helped steady the chip ship, which had wobbled again yesterday as new licensing fees linked to the U.S.-China trade spat sank Nvidia (NVDA.O), opens new tab stock by almost 7%.
But if investors expected the Fed to bail the market out, Chair Jay Powell made it clear that's not happening any time soon.
Speaking in Chicago late yesterday, Powell seemed to suggest that the central bank would be on hold for an extended period to tamp down inflation expectations.
"Tariffs are highly likely to generate at least a temporary rise in inflation," he said. "The inflationary effects could also be more persistent."
While Powell's resolve to hold the line did little to offset a 2%-plus drop in the S&P 500, Treasury yields did fall back as market-based measures of long-term inflation expectations remain anchored close to 2%.
Meanwhile, the Bank of Canada also surprised some by resisting another rate cut on Wednesday, perhaps mindful of the upcoming Canadian election. With this North American rate stasis in the background, the ECB is now on deck.
Money markets are priced for another quarter point ECB rate cut today to 2.25%, as the euro is close to a three-year high against the ailing dollar amid heightened trade war uncertainty and the euro's real effective exchange rate index is at a 10-year high.
The euro ebbed a touch ahead of the decision, German bund yields nudged higher and euro stock benchmarks (.STOXXE), opens new tab were slightly in the red. A rare earnings miss from luxury brand Hermes (HRMS.PA), opens new tab dampened the mood.
Back on Wall Street, investors are awaiting another heavy release of housing and jobless data and earnings updates, including Netflix (NFLX.O), opens new tab, on Thursday. March retail and industry figures on Wednesday showed only slight misses on the most sensitive readings.
On the trade war front, attention turns to Washington's negotiations with Japan's delegation. Italy's Prime Minister Georgia Meloni also meets President Donald Trump on Thursday.
Finally, check out my column today, where I look at how the Fed's hard-nosed stance in the face of tariff uncertainty and market volatility appears to be winning the battle to keep long-term inflation expectations anchored.
Chart of the day
As the U.S.-China trade war escalates, everyone is watching China's holdings of U.S. government debt like a hawk, especially following a serious disturbance in Treasury markets last week. Treasury data on foreign holdings of U.S. debt securities released on Wednesday are only for February - before the tariff spiral truly kicked off. But the numbers showed holdings by Chinese entities actually ticked up during the month, though that's likely only part of the picture.
China held $784.3 billion, up from $760.8 billion, and Japanese investors also upped their lot too. There is a presumption that many Chinese holdings are held in proxy in Europe, most likely captured as Belgian holdings where the Euroclear clearing house is based. That said, Belgium-based holdings, opens new tab also rose by almost $20 billion in February too. So if China has offloaded Treasuries of late, we will have to wait for further hard data to find out.
Today's events to watch
* European Central Bank policy decision, with press conference from ECB President Christine Lagarde
* U.S. March housing starts/permits, weekly jobless claims, Philadelphia Federal Reserve's April business survey
* Federal Reserve Board Governor Michael Barr speaks
* International Monetary Fund Managing Director Kristalina Georgieva speaks ahead of IMF/World Bank Spring meeting
* Japan Economy Minister Ryosei Akazawa meets U.S. Treasury Secretary Scott Bessent in Washington. Italy's Prime Minister Giorgia Meloni meets U.S. President Donald Trump in Washington
* US corporate earnings: Netflix, American Express, State Street, Blackstone, Charles Schwab, Snap-On, Fifth Third Bancorp, DR Horton, KeyCorp, Huntington Bancshares, Marsh & Mclennan, UnitedHealth, Truist Financial, Regions Financial etc
* U.S. Treasury sells 5-year inflation protected securities
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, is committed to integrity, independence, and freedom from bias.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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