A look at the day ahead in U.S. and global markets from Mike Dolan.
With a bit of a lag perhaps after Friday's strong jobs report, markets are realising the U.S. economy is not yet slowing as fast as they had assumed or the Federal Reserve may have wanted.
While dodging recession in 2023 should ostensibly be a good thing for most people, it raises uncomfortable inflation scenarios that question just how high Fed interest rates need to go and how long they stay there. And given that investors are overwhelmingly positioning for peak rates by mid year and Fed rate cuts after that, the 'good news is bad news' reactions re-emerged on Monday.
The latest trigger was surveys showing the U.S. service sector had regained steam in November, with employment there rebounding - much like the robust November payrolls report had indicated on Friday.
With next week's Fed meeting in view, the readout saw the S&P500 record its worst day in almost a month and the 'fear index' of Wall St volatility jumped back from 8-month lows. Futures markets pushed their implied Fed 'terminal rate' next May back above 5% - from as low as 4.85% shortly after Fed Chair Jerome's peculiarly dovish speech last week.
U.S. stock futures and equities in Europe and Asia were flat first thing on Tuesday. The dollar firmed up.
The nightmare scenario for some investors is that the Fed does indeed pause its rate rise campaign next Spring and the economy picks up pace - but inflation fails to return close to target and the central bank is forced to resume tightening later in the year, pushing recession onto 2024's radar too.
With Fed officials in their pre-meeting blackout period, each data point will now be very market sensitive. Tuesday's international trade soundings for October will be scanned for early indications of fourth-quarter GDP.
Even though some assume Europe is already in recession, the incoming German industrial numbers are showing it may be more shallow than many first feared - with its own implications for inflation and interest rates there.
European Central Bank 'doves' struck a more mixed tone this week - with ECB chief economist Philip Lane saying inflation is close to a peak even if more rate rises are needed. Ireland's central bank chief Gabriel Makhlouf reinforced market pricing for downshift in ECB rate rises to a 50 basis point hike next week, but also said rates may need to exceed current terminal rate assumptions of 3%.
Australia's central bank was similarly unaccommodating on Tuesday as it raised interest rates to a 10-year high of 3.1% and stuck with its projection that more hikes are needed to cool inflation - to some surprise in markets.
There was much better news from crude oil markets, where Brent skidded further to below $82.50 as the Russian oil price cap and sanctions came into effect - with the fall from Monday's peak close to 7%. The year-on-year oil price gain, which was almost 100% in April, has retreated back toward 10%.
There were further signs that China's COVID restrictions are being lifted gradually - though that's ambiguous for global inflation outlooks more generally.
There will also be attention later on the U.S. Senate runoff in Georgia - although Democrats have control of the Senate regardless.
In technology, Facebook (NASDAQ:META) parent Meta Platforms on Monday threatened to remove news from its platform if the U.S. Congress passes a proposal aimed at making it easier for news organizations to negotiate collectively with companies like Alphabet (NASDAQ:GOOGL), Google and Facebook.
Key developments that may provide direction to U.S. markets later on Tuesday:
* US Oct international trade balance, Canada Oct trade balance
* U.S. corporate earnings: Autozone, Toll Brothers (NYSE:TOL), MongoDB (NASDAQ:MDB)
* ECOFIN of EU finance ministers meet in Brussels
* Results from U.S. Senate runoff in Georgia GRAPHICS: Surprises still positive, https://fingfx.thomsonreuters.com/gfx/mkt/mypmonzoqpr/One.PNG GRAPHICS: RBA continues with moderate rate hikes, https://www.reuters.com/graphics/AUSTRALIA-ECONOMY/RATES/mopakngzapa/chart.png GRAPHICS: Fed missing the mark, https://www.reuters.com/graphics/FED-INFLATION/USFED-INFLATION/gdvzqyoeypw/graphic.jpg
(By Mike Dolan, editing by Alexandra Hudson (NYSE:HUD), mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)