Morning Bid: Waller and Bessent help peg back Treasury yields

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

Salvos from a Federal Reserve governor and the incoming Treasury Secretary helped nail down this week's inflation-inspired retreat in worrisome U.S. Treasury yields before Donald Trump's inauguration as president on Monday.

The reversal of the year's rise in U.S. yields and the dollar coupled with news of an upbeat end to last year for China's economy nudged world stocks up on Friday.

Two-year Treasury yields hit their lowest level since Jan. 2 - a punchy 20 basis points off Monday's peaks - after Fed board governor Christopher Waller on Thursday held out the chance of three or four interest rate cuts this year.

Not unlike a similar forecast from Bank of England policymaker Alan Taylor the previous day, the unusually dovish take from Waller suggested twice as much easing this year than currently priced into futures markets.

With the Fed governor welcoming the week's surprisingly soft inflation report and saying March could not be ruled out for a resumption of rate cuts, Fed funds futures have moved back closer to pricing two rate cuts in 2025 - having doubted any cuts were coming as recently as last week.

The rally in Treasuries saw two-year yields slip below 4.45% and the 10-year probed back under 4.60%. The dollar index held up, partly because the yen weakened despite fresh reports the Bank of Japan would raise its key policy rates next week.

Even though a tech-sector drag saw Wall Street stock indexes step back on Thursday - after the prior session's best day of the year so far, amid an earnings-related bank stocks boom - futures were up again ahead of Friday's bell and a three-day weekend due to Monday's Martin Luther King holiday.

BESSENT HEARING

Next (LON:NXT ) week's inauguration and Trump's initial policy moves are now firmly in focus and the Treasury market remains key.

To that effect, the confirmation hearing for Trump's Treasury Secretary pick Scott Bessent on Thursday was an important marker for the debt market and the dollar.

Bessent underscored plans for a rollover of Trump's 2017 tax cuts - positing an economic "calamity" if they were not, despite disquiet among some Congressional Republicans. But he also stood squarely behind the dollar's dominant global role, supported Fed independence and insisted no debt default would ever be considered.

Earlier in the day, the latest U.S. economic health checks showed retail spending remained firm, weekly jobless claims ticked up and business confidence captured by the Philadelphia Fed survey jumped higher this month. December industry and housing starts numbers are out later on Friday.

Overseas, news of a 5% Chinese gross domestic product growth for 2024 met both market forecasts and the government's target -- despite some doubts about that only a few months ago. Fourth quarter annual readings were higher than expected at 5.4% and both industrial and retail sales growth in December also surprised to the upside.

Perhaps of greatest relief in Beijing was news that monthly house prices stopped falling for the first time since 2023 -- even though they remained 5.3% lower year-on-year.

Chinese stocks were marginally higher.

Longer-term problems for the Chinese economy continued to lurk, however, with data showing the population there fell last year for the third year running.

In Europe, euro zone inflation came in as expected but there was another negative surprise for Britain's struggling economy with a surprise drop in UK retail sales in December. The pound and recently edgy British gilt yields slipped.

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



* U.S. December housing starts and permits, Dec industrial production, Nov TIC data on foreign holdings of Treasuries

* U.S. corporate earnings: State Street (NYSE:STT ), Citizens Financial (NYSE:CFG ), Regions Financial (NYSE:RF ), Truist, Huntington Bancshares (NASDAQ:HBAN ), Schlumberger (NYSE:SLB ), Fastenal (NASDAQ:FAST )

Source: Investing.com