OPENING CALL
Stock futures edged into the red on Tuesday and benchmark government bond yields were little changed ahead of the Federal Reserve's policy decision midweek and after the market easily absorbed the Bank of Japan's first rate hike in 17 years.
Markets are convinced the Fed will leave rates unchanged, but wary that it may tweak its forecasts of rate trajectory given recent sticky inflation data.
The chances of the U.S. central bank cutting interest rates by at least 25 basis points at its meeting in June is now priced 55.3%, down from 75.9% just a month ago, according to the CME FedWatch tool.
This shift has caused the yield on the benchmark 10-year Treasury to climb up to 4.33%, near its highest level since late November.
"Inflation has been firmer in recent months, but we think it is still on track to fall enough by the June FOMC meeting for a first cut," Goldman Sachs said.
"This has become less obvious though, and our inflation path for the rest of the year is now in a range where small surprises could have large consequences."
Goldman Sachs added: "The main risk is that FOMC participants might instead be more concerned about the recent inflation data and less convinced that inflation will resume its earlier soft trend."
Meanwhile, markets appear to have easily absorbed the Bank of Japan's move away from negative interest rates, after it raised borrowing costs for the first time since 2007.
Premarket Movers
DLocal reported fourth-quarter earnings of 10 cents a share, missing analysts' estimates of 15 cents. The stock declined 12%.
Fusion Pharmaceuticals is being acquired by AstraZeneca for $21 a share in cash plus a non-transferable contingent value right of $3 a share in cash. The upfront cash portion of the deal is about $2 billion. The initial price is a 97% premium to Fusion's closing market price of $10.64 on Monday. Fusion shares rose 94% to $20.65.
National CineMedia was up 20% after it posted an increase in fourth-quarter profit and said it would be buying back $100 million of stock.
Nvidia was down 1.2% after it announced at its GTC conference its next-generation chip architecture and related products, including its latest artificial-intelligence chip.
Synopsys rose 2.4% after it said it was working with Nvidia to " substantially accelerate" chip design and automotive prototyping using AI.
Post-Close Movers
Comtech Telecommunications warned of challenging business conditions and an unpredictable operating environment. The company's loss widened in the fiscal second quarter after net bookings sank. Shares fell 8.7%.
Spire Global announced a collaboration with Nvidia to improve weather prediction. The company said it would integrate its data with Nvidia's atmosphere simulation software to create new capabilities. Shares rose 9.9%.
Economic Insight
The Federal Reserve is likely to remain cautious this year and "it is possible [it] maintains its 2024 target rate near its current 5.25%-5.5% range," Vanguard said.
Vanguard has changed its view on the U.S. economy, with a recession in 2024 no longer its baseline and a soft landing can't be ruled out. It has also raised its forecast for U.S. growth this year to 2% from 0.5% and lowered its forecast for the year-end unemployment rate to 4% from 4.8%.
The better economic outlook goes alongside a higher-than-previously seen core inflation this year, forecast by Vanguard at 2.6% versus 2.3% previously.
Watch For:
Housing Starts, Canadian CPI
Today's Headlines/Must Reads
- Global Era of Negative Interest Rates Ends
- The Fed Is Playing a Waiting Game on Rate Cuts. The Rules Are Starting to Change
- Governments Across the U.S. Are Handing Residents Cash-No Strings Attached
- Russia's Backdoor to the Global Banking System Is Slamming Shut
MARKET WRAPS
Forex:
The dollar has risen recently and should continue to gain in the medium term due to markets significantly scaling back expectations of Federal Reserve rate cuts to two by the end of the year from seven anticipated earlier this year, XS.com said.
"The dollar index is trading in the green zone after markets were shaken on Thursday by a series of U.S. economic data releases, indicating that inflation pressures have not yet subsided," XS.com said.
The Federal Reserve's monetary policy will drive USD/JPY more than that of the Bank of Japan, SEB Research said.
"Although we still believe U.S. rates will have a more substantial decline in 2Q, leading USD/JPY to trade towards 139, the fate of the pair will be dominated by the Fed rather than the BOJ."
Danske Bank Research expects CHF/JPY to fall as it forecasts an interest-rate cut from the Swiss National Bank on Thursday.
Bonds:
As inflation proves persistent, the Fed's dot plot might project only two rate cuts this year, possibly pushing Treasury yields higher, Saxo said. The Summary of Economic Projections might reveal higher growth and inflation forecasts for 2024, Saxo said.
"Treasury yields are likely to adjust higher across tenors, with two-year yields testing resistance at 4.75% and 10-year yields breaking above 4.35% for the first time since November last year."
Eurozone government bond yields were little changed in early European trade, with investors unfazed by the Bank of Japan's exit from its negative interest rate policy, analysts said.
"The BOJ's cautious rate hike should also not weigh on EGBs or USTs," Commerzbank Research said.
In the eurozone government bond space, French OATs are often seen as the most exposed to Japanese repatriation flows, Commerzbank added.
Energy:
Oil prices edged lower after reaching highs last seen in early November on signs of a tighter market, but traders remain cautious ahead of the Fed's policy meeting.
"The major short-term risk is a hawkish shift from the Fed that could spoil global demand expectations and limit the topside," Swissquote Bank said.
Oil was still hovering near a four-and-a-half-month high after gaining support from Ukrainian attacks against Russian refineries, Iraq pledging to reduce oil exports and upbeat economic data from top consumer China.
There's a high chance that Brent crude may breach key resistance at $87.30/bbl, given its swiftly building upward momentum on the weekly chart, UOB said.
On Monday, Brent rose to test significant resistance formed by the convergence of its descending weekly trendline and weekly Ichimoku cloud resistance, with this trendline now slightly lower at $87.30/bbl, UOB noted.
A clear breach of this resistance could trigger a rapid rise, with subsequent resistance levels at $90.00/bbl and $93.80/bbl.
Metals:
Base metals and gold were weaker in Europe on a stubbornly-strong dollar ahead of Wednesday's Fed rate decision.
Investors turned their attention to the Fed's policy meeting--and while it is expected to keep interest rates unchanged, the meeting could provide hints around the timing of future rate cuts.
Investors believe the Fed will strike a more hawkish tone tomorrow due to firmer inflation metrics, better U.S. data, and higher energy prices, Peak Trading Research said.
TODAY'S TOP HEADLINES
Cisco Closes $28 Billion Acquisition of Splunk, Betting Big on AI
Cisco Systems closed its $28 billion all-cash acquisition of cybersecurity and analytics company Splunk on Monday.
The deal, the largest in Cisco's history, was completed months earlier than projected and reflects the extraordinary effort many companies are undertaking as they remake their businesses around data and artificial intelligence.
Crypto Lender Genesis Says Its Liquidation Plan Abides by Bankruptcy Rules
Genesis Global and a majority of its creditors on Monday defended the bankrupt cryptocurrency lender's proposed chapter 11 liquidation plan against objectors including its corporate parent, Digital Currency Group.
Judge Sean Lane of the U.S. Bankruptcy Court in White Plains, N.Y., heard closing arguments over whether to approve Genesis's plan to wind down the business and pay back as much as it can to its creditors and customers.
Francisco Partners to Acquire Jama Software for $1.2 Billion
Francisco Partners has agreed to acquire Jama Software from shareholders that include existing backers Insight Partners and Madrona Ventures for $1.2 billion.
Insight and Madrona previously led a $200 million growth investment in the requirements, risk and test management software provider back in 2018. In five years, Jama has tripled its recurring revenue, according to a press release.
RBA Keeps Rates Steady, Says All Policy Options Remain on the Table
SYDNEY-The Reserve Bank of Australia said Tuesday that it still can't rule out the possibility that interest rates will need to be raised further, adding that inflation remains too high and is expected to remain elevated for some time yet.
The RBA left its official cash rate on hold at 4.35% at its policy meeting. The decision was widely expected by economists.
Russia's Backdoor to the Global Banking System Is Slamming Shut
When the U.S. and Europe tried to sever Russia from the Western financial system, Moscow found workarounds. Key among them: banks in the Gulf and Europe that maintained ties with Russia.
Now, Washington's efforts to close these loopholes appear to be paying off. Dubai's main state-owned bank has shut some accounts held by Russian oligarchs and traders of Russian oil. Turkish lenders are growing wary of handling Russia-related business. The U.S. has also put bankers in Vienna, another important financial hub, on notice.
Trump Stays on Sidelines as Biden Takes Heat Over Israel-Hamas War
WASHINGTON-Former President Donald Trump has been open in criticizing President Biden's handling of the Israel-Hamas war. But the presumptive GOP presidential nominee has had little to say about how he would resolve the conflict.
(MORE TO FOLLOW) Dow Jones Newswires
03-19-24 0612ET
