Markets stay bumpy awaiting jobs reality check

A look at the day ahead in U.S. and global markets from Mike Dolan

Seeking some calm, markets remain edgy following the volatility jolt of the past week and traders now seek some re-assurance the real economy has not shifted underneath them.

Volatility spikes like the one seen on Monday rarely disappear instantly and, with the VIX ‘fear gauge’ still above historical averages of about 20, some turbulence remains. At less than half Monday’s peak, however, some healing is underway.

The jangled nerves were evident on Wednesday as an initial bounce in Wall St stocks faded by the close, with anxiety fed by another red flag on the artificial intelligence theme from Super Micro’s poor results and after a messy 10-year Treasury auction.

To be sure, the 10-year note sale was allocated at 3 basis points above pre-auction levels and demand at 2.32 times the paper on offer was the lowest in almost two years. But that mostly reflected the week’s sudden swoon in yields below 4% and the $42 billion sale went off with funding for Treasury almost 15bp cheaper than it would have got a week ago.

Some $25 billion of 30-year bonds are up for grabs later on Thursday and provide the latest test – with the 2-to-30-year Treasury yield curve now positive to the tune of 27bps, having hit its steepest in two years on Monday. The 2-to-10 curve remains slightly inverted.

Attention now turns back to whether the U.S. labor market is weakening at a pace that Friday’s payrolls report suggested and the release on Thursday of the weekly jobless claims report takes on elevated significance for markets still largely priced for a Federal Reserve rate cut of up to 50bps next month.

New unemployment claims have been rising and hit their highest since August last year in the most recent week.

Stock futures were steady ahead of the open today, however, with the VIX remaining below 30.

European and Asian benchmarks were slightly lower – but with far less movement than earlier in the week. China’s mainland index was marginally higher.

It was nervy still in Japan – the epicentre of much of the past week’s angst due to unwinding short yen ‘carry trades’ that seeded wild 10%-plus swings in the Nikkei stock index. But with a loss on Thursday of less than 1%, it appeared almost serene by comparison with Monday and Tuesday.

There were some concerns from the minutes of last week’s rate-raising Bank of Japan meeting, which showed board members calling for the need to keep raising interest rates.

But that was recorded before the market turbulence that has since seen BOJ top brass say they would stall on that if it were just to fuel more market disruption.

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And Finance Minister Shunichi Suzuki said on Thursday the authorities were closely watching stock market developments, even if not yet planning specific actions yet.

With estimates that most of the outstanding yen carry trades had now been unwound, the dollar/yen exchange rate steadied and retained a perch above 146. The dollar index more broadly edged lower as two and 10-year Treasury yields subsided once more in early trading on Thursday.

In earnings, there will be a close look at pharma giant Eli Lilly’s results.

European rival Novo Nordisk on Wednesday reported weaker-than-expected quarterly sales of its popular weight-loss drug Wegovy, stirring worries among investors about stiffening competition from Eli Lilly and sending its shares down 8%.

Novo is spending billions of dollars to lift Wegovy production to meet demand and fend off Lilly, which launched its rival therapy Zepbound in the U.S. last December. While the two companies are now going head-to-head with obesity treatments in a number of markets – the most lucrative one by far is the U.S., where more than 70% of adults are obese or overweight.

Key developments that should provide more direction to U.S. markets later on Thursday:

* US weekly jobless claims, June wholesales sales; Mexico July inflation

* Richmond Federal Reserve President Thomas Barkin speaks

* Central Bank of Mexico policy decision

* US corporate earnings: Eli Lilly, Gilead Sciences, News Corp, Paramount Global, Expedia, Insulet, Solventum, Take-Two Interactive Software, Akamai Technologies, Epam Systems, Viatris, Martin Marietta Materials, Parker-Hannifan, NRG Energy, Vistra

* US Treasury sells $25 billion of 30-year bonds, $95 billion of 4-week bills

(By Mike Dolan; Editing by Toby Chopra; mike.dolan@thomsonreuters.com)