A look at the day ahead in U.S. and global markets from Mike Dolan
A buoyant U.S. economy, hawkish Federal Reserve and dysfunctional Congress are sending Treasury bond yields soaring through 5% and beyond, hobbling a stock market trying to parse a mixed earnings picture from Wall Street megacaps.
For all the added risk of a renewed Middle East conflict, energy prices remained contained - in part due a brighter crude supply picture as Washington lifted some sanctions on long-absent major oil exporter Venezuela.
The company earnings picture, meantime, was mixed to sour over the past 24 hours in both the U.S. and Europe. Frankfurt-listed Tesla (NASDAQ:TSLA) shares fell 5.1% after the EV maker missed margin forecasts, while digital streaming giant Netflix (NASDAQ:NFLX) surged 12.5% after beating Street estimates for new customers.
But the sheer strength of this week's U.S. retail, industrial and - again on Wednesday - housing construction readouts have combined with a persistently hawkish Fed message on 'higher for longer' interest rates.
Despite decent demand at a typically awkward 20-year bond auction on Wednesday, yields continued to spiral higher overnight and ahead of Fed Chair Jerome Powell's key speech later on Thursday.
Adding to the market angst was the hiatus over the vacant House speaker role in Congress as right-wing Republican Jim Jordan failed for the second time to get enough votes from his own party to take the position.
The ongoing vacuum raises fears for any movement on spending bills and reignites fears of a government shutdown next month.
And to add insult to injury, there were some signs of Chinese entities winding down another $16 billion of their Treasury holdings through August to the lowest level since 2009 - likely banking much of them for now in dollar cash instruments.
Although ongoing official support for the weakening yuan may have been a factor, this sort of shift in the now $805 billion stash has long been a background fear in the Treasury market amid the increasingly tense geopolitical standoff between the world's two biggest economies.
A similar concern smoulders about Japan's Treasury holdings as the yen weakens close to 150 per dollar and the prospect of Bank of Japan dollar selling intervention heightens.
The upshot of all factors has seen Treasury yields climb ever higher through the night - with two-year and 20-year yields now both above 5.25%, the latter at a record high and the former the highest since 2006. Thirty-year yields are also now above 5% and hit a 16-year high at 5.06% on Thursday.
Ten and five-year tenors also saw yields soar to within a hair's breadth of 5% early on Thursday too. The yield curve continued to 'bear steepen' to show its shallowest inversion between two and 10-year yields in more than a year and actually in positive territory between two and 20 years.
According to the Mortgage Bankers Association, the average contract rate on a 30-year fixed-rate mortgage rose to 7.70% last week, the highest since November 2000.
The ructions in the bond market and incoming earnings saw Wall St indexes hit their lowest in 10 days on Wednesday and futures were in the red again ahead of the open today.
Overseas, Chinese stocks hit a new low for the year on Thursday amid dwindling market confidence there and as foreign capital recorded net outflows of 11.7 billion yuan ($1.60 billion) via the northbound trading route, the largest daily outflow in two months.
China's biggest private property developer Country Garden has still not paid a coupon on a bond after a 30-day grace period, according to bondholders who are now seeking talks. Non-payment would put the developer at risk of default.
The offshore yuan fell to its lowest in more than a month.
Key developments that should provide more direction to U.S. markets later on Thursday:
* U.S. corporate earnings: Blackstone (NYSE:BX), Fifth Third Bancorp (NASDAQ:FITB), Philip Morris (NYSE:PM), Union Pacific (NYSE:UNP), AT&T (NYSE:T), CSX (NASDAQ:CSX), Freeport-McMoRan (NYSE:FCX), Truist Financial (NYSE:TFC), American Airlines (NASDAQ:AAL), Alaska Air (NYSE:ALK), Intuitive Surgical (NASDAQ:ISRG), KeyCorp (NYSE:KEY), Snap-On, Pool (NASDAQ:POOL), Genuine Parts
* U.S. Oct Philadelphia Fed business survey, Sept existing home sales, weekly jobless claims* U.S. Federal Reserve Chair Jerome Powell, Fed Vice Chair Philip Jefferson, Fed Vice Chair for Supervision Michael Barr, Dallas Fed President Lorie Logan, Chicago Fed chief Austan Goolsbee, Atlanta Fed chief Raphael Bostic and Philadelphia Fed chief Patrick Harker all speak
* U.S. Treasury auctions 5-year inflation-protected notes, 4-week bills
(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)