U.S. equity futures drifted lower Monday, while the dollar extended declines against its global peers, as investors faded bets on easing Covid restrictions in China and focused on the prospect of near-term recession in the world’s biggest economy.
Multiple reports overnight have noted a modest easing of various pandemic-era rules in China, with cities across the country removing demands for negative Covid tests to use public transport and re-opening malls, parks and movie theatres in the wake of rate public unrest in the world’s second-largest economy late last month.
The changes helped boost China stocks in overnight trading, with the Shanghai Composite rising 1.76% on the session and the region-wide MSCI ex-Japan benchmark gaining 1.7% heading into the final hours of trading.
However, data showing a fifth consecutive contraction in economic activity in Europe, and highlighting the prospect of an early 2023 recession, blunted the impact of China’s loosening Covid policy and clip overnight gains for U.S. equity futures, which are also fighting against the prospect of tighter Federal Reserve policy following a firmer-than-expected reading of November job gains last Friday.
The report, which showed U.S. employers added 263,000 new hires last month, also showed average hourly earnings rising by 0.6%, double the Street consensus forecast and rekindling concerns that the tight labor market will continue to stoke inflation pressures into the early months of next year.
Wall Street is likely to focus on market reaction to Friday’s stronger-than-expected November jobs report, as well as developments in China’s Covid crisis, in what is expected to be a quiet week for earnings and data releases.
Producer price inflation figures on Friday, as well as trade and export data Tuesday, are the key economic data points in focus as traders piece together their 2023 forecasts amid a rising debate over the chances of recession in the world’s largest economy.
Other releases include factory orders and ISM Services data on Monday, weekly jobless claims on Thursday and what could be an important reading of consumer sentiment from the University of Michigan’s closely-tracked survey on Friday.
Recession concerns, however, are holding down Treasury bond yields s investors look to a rapidly-weakening housing market, a still-hawkish Fed and contracting business activity heading into the final months of the year.
“We may have seen, or be seeing, peak inflation but it is not until we see weakness in labour markets that headline inflation will reach the 2% target that is common to most major central banks,” said Nigel Green, CEO of London based deVere Group.
“To achieve that, interest rates may have to remain at peak levels for some time, and recession in the UK and eurozone is a certainty,” he added. “The U.S. looks set to have the shallowest downturn, but may still record a recession.”
Benchmark 10-year Treasury note yields were marked 3 basis points lower on the overnight session at 3.528% while 2-year note yields drifted to 4.313% – pegging the gap between the pair at around 80 basis points, near to the steepest level of inversion since the early 1980s.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.10% lower at $104.440, matching levels last seen in early June.
Heading into the start of the trading day on Wall Street, futures contracts tied to the S&P 500 are indicating a 22 point pullback while those linked to the Dow Jones Industrial Average are priced for a 150 point decline. The tech-focused Nasdaq is looking at a 55 point pullback.
Global oil prices moved higher Monday after OPEC leaders, as well as key allies including Russia, agreed to maintain their program of production cuts until at least the end of next year.
The cartel, which concluded a virtual meeting late Sunday, made no changes to their October agreement, which pulled 2 million barrels from the market each day amid worries over global demand linked to recession risks.
The moves followed a late Friday decision by the leaders of the G-7, along with Australia, to agree a cap on the price of imported Russian crude at $60 a barre, but were partly offset by optimism linked to China’s moderately improving Covid situation, which could stoke demand in the world’s biggest energy market.
Brent crude futures for February delivery, the global pricing benchmark, were last seen $2.28 higher on the session at $87.85 per barrel. WTI contracts for January, which are tightly-linked to U.S. gasoline prices, were marked $2.13 higher at $82.11 per barrel.