A look at the day ahead in U.S. and global markets from Mike Dolan
A relatively soothing bond market reading of the Federal Reserve's latest meeting minutes has helped calm the new year horses, but edgy geopolitics and oil price gains still rankle.
Even though Wall St stock indexes clocked a second straight day of hefty losses on Wednesday - led this time by the biggest one-day drop in small cap stocks since the March regional bank crunch - bonds rallied on the minutes.
While the Fed predictably gave no timeline for rate cuts this year, it flagged impressive disinflation and concerns about "overly restrictive" policy into a slowing economy - and risks to its dual mandate of stable prices and maximum employment in the event of an "abrupt downshift" in labor markets.
But Treasuries - where 10-year yields have retreated about 5 basis points from Wednesday's 4% peaks - got an additional fillip from a Fed discussion about how it may trail a slowing of its balance sheet rundown - or "quantitative tightening" (QT) process.
Although Fed officials said market liquidity was still abundant, some pointed to the steep drop in daily takeup of the Fed's "reverse repo" money draining facility and said it would be "appropriate" to begin discussing the factor that may lead the central bank to slow the balance sheet runoff and halt QT.
The effect of the Fed minutes combined with news that U.S. job openings fell to nearly a three-year low in November as the labor market gradually cools and an ISM manufacturing survey showing another month of contracting activity and falling input prices.
With the fourth-quarter corporate earnings season looming next week, the cooling of the wider economy has seen the U.S. economic surprise index on the cusp of turning negative for the first time since May.
Richmond Fed boss Thomas Barkin struck a dovish note on Wednesday and flagged "real progress" on inflation that made a soft economic landing "increasingly conceivable".
The upshot of all the new information was another slight drop in the futures' market chances of first Fed rate cut by March to 75% - but with 146 bps of rate cuts still priced for the whole year. And U.S. stock futures have caught a break and are trading higher at last before Thursday's open.
The dollar index retreated from near one-month highs as U.S. yields subsided.
SUPPLY CHAIN JITTERS
Ahead of Friday's December employment report, Thursday's data diary throws up ADP's private sector jobs reading and Challenger's layoff numbers for the same month - as well as weekly jobless claims.
But as many eyes may be on the New York Fed's global supply chain pressure index - with fears of an escalation of the Middle East conflict increasing jitters about shipping supply chains and oil prices.
Members of the U.N. Security Council on Wednesday called on Yemen's Iran-aligned Houthis to halt their attacks on shipping in the Red Sea and Gulf of Aden, saying they are illegal and threaten regional stability, freedom of navigation and global food supplies.
But tensions in Iran increased as its elite Revolutionary Guards and First Vice President Mohammad Mokhber vowed revenge for explosions this week that killed nearly 100 people at a ceremony to commemorate top commander Qassem Soleimani, who was killed by a U.S. drone in 2020 in Iraq.
Oil rose more than 1% on Thursday - with year-on-year U.S. crude flipping to its most positive since October - and added to gains in the previous session on concerns over Middle Eastern supply following disruptions at an oilfield in Libya and heightened tensions regarding the Israel-Hamas war.
U.S. crude gains were spurred by news the U.S. government was seeking three million barrels to re-fill its strategic petroleum reserve.
In Europe, headline annual inflation rates for last month climbed again - but monthly readings were more subdued and below many forecasts.
Key diary items that may provide direction to U.S. markets later on Thursday:
* U.S. Dec ADP private sector jobs, Dec Challenger layoffs, weekly jobless claims, NY Fed's Dec global supply chain pressure index, U.S. Dec final S&PGlobal service sector survey
* U.S. Treasury sells 4-week bills
* U.S. corporate earnings: Conagra brands, Walgreens Boots Alliance (NASDAQ:WBA), Lamb Weston Holdings (NYSE:LW)
(This story has been refiled to remove the repetitive paragraph 7)
(By Mike Dolan, Editing by Alison Williams; mike.dolan@thomsonreuters.com)