By Geoffrey Smith
Investing.com — The central bank action switches from the U.S. to Europe, as the Omicron variant of Covid-19 starts to show its effect on economic data. Jobless claims, housing starts and two regional Fed business surveys are due. Stocks are due to extend their post-Fed gains as bond yields continue to fall, and oil prices get a booster shot from a drop in U.S. crude inventories. Here’s what you need to know in financial markets on Thursday, 16th December.
1. Stocks set to extend gains
U.S. stock markets are set to extend Wednesday’s gains when they open later, supported by a bond market that took comfort from the Federal Reserve’s sharp hawkish turn.
By 6.35 AM ET (1135 GMT), Dow Jones Futures were up 263 points or 0.7%, while S&P 500 Futures were up 0.8% and Nasdaq 100 Futures were up 1.0%. The S&P had hit a new all-time on Wednesday after the Fed said it will end its asset purchases by March and guided for three 25-basis point interest rate hikes next year.
The 10-Year benchmark Treasury yield, which peaked at 1.71% earlier in the year on fears that the Fed was falling behind the curve, fell three basis points to 1.44% in the overnight session.
Stocks likely to be in focus later include Swiss pharma and healthcare giant Novartis (NYSE:NVS) after it announced a new $15 billion buyback, as well as NY-listed French biotech Valneva (NASDAQ:VALN), which published positive clinical trial results for its experimental Covid vaccine earlier.
2. Central bank action switches to Europe
The European Central Bank will announce its policy decisions at 7:45 AM ET (1245 GMT). No change in its interest rates is expected until 2023, but the bank is likely to signal a modest tightening of its policy stance, confirming it will stop its unrestricted bond purchases (the so-called Pandemic Emergency Purchase Program) at the end of March. President Christine Lagarde’s press conference follows 45 minutes later.
The big open question for the ECB is how it adjusted its other, ongoing bond purchases, which are currently running at 20 billion euros a month. This program doesn’t have as much freedom to buy the bonds of weaker members of the currency union, so the decision may result in some volatility in intra-Eurozone yield spreads,
Earlier, IHS Markit’s composite purchasing managers index for the Eurozone fell by more than expected to the lowest since April, although it still remains comfortably in expansion territory at 53.4. The drop was entirely due to the services index, which showed the first signs of a new Covid infection wave hitting activity.
The ECB will also publish new forecasts for inflation and growth in the next two years.
3. Bank of England on a knife-edge
The Bank of England faces a much tougher decision. Market expectations have switched back to expecting a 15 basis point increase in the Bank’s key rate to 0.25%, which would be the first rate hike by a G7 central bank since the start of the pandemic.
However, data from U.K. health regulators suggest that the Omicron variant of Covid-19 is now spreading so rapidly that an economic slowdown appears inevitable, if only due to the large numbers of workers who will have to stay in isolation as they recover. IHS Markit’s composite U.K. PMI fell to its lowest since March at 53.2. The number of U.K. Covid cases leaped by over 30% in a single day on Wednesday to a new record high.
Elsewhere around the world, the central bank of Norway raised its key rate by 25 basis points to 0.5%, while Turkey’s lira crashed to new lows after the TCMB cut its key rate again by 1 percent to 14%, some 7 percentage points below the current rate of inflation. The Philippines and Indonesia left their key rates unchanged. Mexico announces its decision later.
4. Jobless claims, housing starts
The U.S. publishes its latest weekly data on jobless claims at 8:30 AM ET, with initial claims expected to edge back up from their multi-decade low of 184,000 last week.
At the same time, data on housing starts and building permits for November are both expected to show modest increases from October’s levels.
Regional business surveys from the Kansas City and Philadelphia Federal Reserve banks are also due, with investors likely to pay particular attention to the development of supply chain pressures and their impact on prices.
5. Oil recovers as EIA inventories show sharp drop
Crude oil prices recovered in line with most other risk assets on the back of the Fed’s decision, the mood also being supported by the sharpest weekly drop since September in government data for U.S. crude inventories.
Stockpiles fell by 3.5 million barrels last week, according to the Energy Intelligence Administration, much more than suggested by the American Petroleum Institute’s estimate on Tuesday.
By 6:35 AM ET, U.S. Crude futures were trading up 1.4% at $7.84 a barrel, while Brent crude futures were up 1.5% at $74.97 a barrel.