A look at the day ahead in U.S. and global markets from Mike Dolan.
World markets have been spooked by the prospect the U.S. may be heading for recession after all but the Federal Reserve may not ride to the rescue - at least not as fast as many assume.
Further signs of sharp disinflation and a screed of dire economic readouts on U.S. retail and industrial activity last month clearly unnerved investors over the past 24 hours - sinking stocks, lifting bonds and dragging on the dollar.
U.S. retail sales fell by the most in a year in December, the second straight monthly decrease, pulled down by declines in purchases of motor vehicles and a range of other goods. Manufacturing fell 1.3% and even though a drop in producer prices may be a relief for inflation worriers, it may also spell trouble for corporate margins.
The jitters fanned out to other parts of the world on Thursday. Japan said its export growth slowed sharply in December as China-bound shipments fell for the first time in seven months, stoking fears for the global economy.
How much December was distorted by an extreme U.S. cold weather snap or the final throes of China's draconian 'zero COVID' lockdowns is unclear.
But despite the warnings, Fed policymakers on Wednesday signaled they will push on with more interest rate hikes, with several supporting a top policy rate of at least 5%.
"I just think we need to keep going," Cleveland Fed President Loretta Mester said.
And many forecasters are now wary the Fed will err on the side of tighter policy to ensure inflation is slayed.
"We continue to forecast a terminal federal funds range of 4.75-5.00% but believe the risks could be skewed a bit higher," HSBC's U.S. economist Ryan Wang said on Thursday.
Markets wobbled on the prospect on Wednesday, with the S&P500 staging its biggest decline of the year so far. U.S. stock futures remained in the red on Thursday and bourses around the world were lower too.
Despite Fed hawkishness about 5%-plus rates, futures markets nudged the likely Fed 'terminal rate' down further to 4.86% and continue to price half a point of rate cuts in the second half of 2023. At 3.32%, 10-year U.S. Treasury yields fell to their lowest since September. The dollar hit its lowest since June.
The other big worry for investors on Thursday - and part of the reason for this week's market wobble - is the looming political showdown over the U.S. debt ceiling.
The United States will likely hit its mandated $31.4 trillion borrowing limit on Thursday, forcing the Treasury to launch extraordinary cash management measures that can likely prevent a debt default until early June.
Apart from raising concerns about possible default on U.S. short-term debt, the political standoff could complicate investors' cash management in money market instruments - prompting search for other havens including long-term Treasuries or even overseas money market funds.
Netflix (NASDAQ:NFLX) tops the latest earnings diary meantime.
Key developments that may provide direction to U.S. markets later on Thursday:
* U.S. Dec housing starts/permits, weekly jobless claims, Philadelphia Federal Reserve's Jan business survey. U.S. Treasury auctions 10-year inflation-protected notes.
* Federal Reserve Vice Chair Lael Brainard, New York Fed President John Williams, Boston Fed chief Susan Collins all speaking; European Central Bank President Christine Lagarde, ECB board member Isabel Schnabel and European Commissioner Mairead McGuinness all speak
* U.S. corporate earnings: Netflix, Procter & Gamble (NYSE:PG), Northern Trust (NASDAQ:NTRS), M&T Bank (NYSE:MTB), PPG Industries (NYSE:PPG), Fifth Third Bancorp (NASDAQ:FITB), SVB Financial, Truist Financial (NYSE:TFC), KeyCorp (NYSE:KEY), Comerica (NYSE:CMA), Fastenal (NASDAQ:FAST)
(By Mike Dolan, editing by XXXX mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)