BOE Warns of Sharp Correction as Geopolitical Worries Mount

BOE Warns of Sharp Correction as Geopolitical Worries Mount; ECB October Rate Cut Bets Rise By Hardika Singh

The prospect of a widening Middle East conflict weighed on U.S. stock futures early Wednesday, while oil prices extended gains.

Investors are bracing for Israel's reaction to Iran's missile attacks. A hawkish retaliation risks a new spiral of escalation, but the U.S. is hoping for a more measured response, similar to when Iran attacked in April.

Financial markets remain vulnerable to a sharp correction, the Bank of England warned Wednesday as a twice-yearly survey found that geopolitical developments are seen as the greatest threat to stability, Paul Hannon writes for The Wall Street Journal.

The BOE's Financial Policy Committe has repeatedly warned that valuations of many financial assets, particularly equities, are "stretched" and could fall sharply in response to economic or geopolitical shocks.

In a survey conducted in late July and early August, the BOE found that 93% of the 55 banks and other financial services firms that responded placed geopolitical risk as the leading threat to the stability of the financial system. That was the highest proportion in the history of the survey, which goes back to 2008.

However, BOE policymakers were concerned that those perceptions of risk didn't appear to be reflected in the pricing of financial assets.

"Global vulnerabilities remain material, as does uncertainty around the geopolitical environment and global outlook," the BOE said. "Markets remain susceptible to a sharp correction." Read more .

Top News Investors Gear Up for October ECB Rate Cut as Inflation Eases

Investors are increasingly betting that the European Central Bank will cut interest rates by another 25 basis points on Oct. 17 due to growing evidence of a significant slowdown in both inflation and economic activity.

Beyond October, many analysts also expect a faster pace of rate reductions than the once-per-quarter pace they had predicted previously, which is likely to cause eurozone government bond yields and the euro to fall.

"Anything other than an October cut will now be difficult to justify," said Jussi Hiljanen, chief strategist for euro and dollar rates at SEB Research.

Rate-cut expectations were given extra impetus after ECB President Christine Lagarde said in a statement to the European Parliament on Monday that the central bank was more confident that inflation would return to the 2.0% target. She said the central bank would take this into account at the October meeting. Read more .

Japan Ministers Ask BOJ to Help Complete Exit from Deflation

The new ministers in charge of Japan's economic and fiscal policies have asked the central bank to help recently sworn-in Prime Minister Shigeru Ishiba's administration declare victory over deflation .

The Bank of Japan should weigh any additional interest-rate increases carefully in order to avoid the risk of cooling the economy too much, Ryosei Akazawa, the new economy minister, said at a news conference on Wednesday.

On Tuesday, Japan's new prime minister, Shigeru Ishiba, pledged to aim for a complete exit from deflation and asked the Bank of Japan to maintain accommodative monetary conditions. Saudi Minister Warns of $50 Oil as OPEC+ Members Flout Curbs

The Saudi oil minister has said that prices could drop to as low as $50 per barrel if so-called cheaters within OPEC+ don't stick to agreed-upon production limits, according to delegates in the cartel. The statements were interpreted by other producers as a veiled threat from the kingdom that it is willing to launch a price war .

Pro Take: Sluggish Home-Buyer Market Not Budging Until It Sees More Fed Action

By Yuri Nagano

The Federal Reserve took a big swing at lowering interest rates with a half-percentage-point cut to its benchmark rate recently, but relief for home buyers may be slow coming. That could leave many would-be buyers reluctant to leave the sidelines, discouraged by continued high mortgage rates and tight home inventory.

Home sales may not really rebound until the second half of 2025, said Mark Palim, chief economist and senior vice president at Fannie Mae. He said activity could pick up once mortgage rates dip below 6%, "a psychologically important barrier for buyers." Fannie Mae forecasts mortgage rates to go down to 5.7% by the end of 2025. Read more .

U.S. Economy Dockworkers Launch Strike at Ports From Maine to Texas

Dockworkers at dozens of U.S. ports are digging in for a massive pay increase , seeking to flex their power in a strike that aims to strangle the flow of trade across much of the country.

Port Strike Puts Pressure on Harris, Biden Ahead of Election The Profane 78-Year-Old Leading the Dockworkers Strike Auto Sales Idling as Prices Remain High

High new-vehicle prices and borrowing costs are keeping some shoppers on the sidelines , pointing to what is expected to be another lackluster sales year for automakers.

JPMorgan Plans to Open Around 100 Branches in Low-Income Areas

JPMorgan Chase is working on opening nearly 100 new branches in low-income areas around the country, including America's inner cities and rural towns where banks have been shrinking their footprint for years.

Forward Guidance Wednesday (all times ET)

8:15 a.m.: ADP employment

11 a.m.: Fed Governor Michelle Bowman speaks

Thursday

8:30 a.m.: Initial jobless claims

9:45 a.m.: S&P final U.S. services PMI

10 a.m.: ISM services

10 a.m.: Factory orders

10:40 a.m.: Minneapolis Fed President Neel Kashkari moderates discussion with Atlanta Fed President Raphael Bostic

Research Fed Interest-Rate Cuts Should Support Credit Spreads

Interest-rate cuts by the Federal Reserve are good for credit spreads, Benoit Anne, managing director for strategy and insights group at MFS Investment Management, says in a note. "While each rate-cutting cycle tends to be different, historically, easing cycles have been associated with tighter spreads," he says. Looking at monthly spread changes for each cutting cycle back to 1989, spreads typically widen out modestly heading into a rate-cutting cycle, stabilize at the time of the first cut and then remain stable or compress modestly through the first several months of the cutting cycle on average, he says. This is particularly the case for soft-landing episodes, Anne says. - Emese Bartha

Basis Points Construction spending fell in August as companies scaled back projects across the U.S. ahead of the Federal Reserve's decision to cut its benchmark interest rate. (MarketWatch) The Institute for Supply Management on Tuesday said its manufacturing PMI, a closely-watched measure of U.S. manufacturing activity, held steady at 47.2 in September. (MarketWatch) Workers are quitting at the slowest pace since the pandemic as hiring dries up and jobs become harder to find, reflecting a cooldown in what had once been a red-hot U.S. labor market. (MarketWatch) Stanley Druckenmiller is shorting U.S. bonds and staying away from the China rally, according to observers at a New York conference where the legendary investor spoke. (MarketWatch) Advances in AI-as well as those still yet to come-likely will lead to job losses in areas of the labor market that avoided such disruptions in the past, something Fed officials are watching closely. (Barron's) As the death toll from Helene continued to rise, the city of Asheville in western North Carolina's Blue Ridge Mountains was picking up the pieces from the devastating storm. Many residents in the mountainous regions of North Carolina and Tennessee hadn't experienced a storm of such a magnitude in their lifetimes, and many were caught unprepared . The eurozone's unemployment rate held steady at a record low in August, though that likely marks only a respite amid signs that the jobs market is weakening as the economy slows. (Dow Jones Newswires) About Us

WSJ Pro Central Banking brings you central banking news, analysis and insights from WSJ's global team of reporters and editors. This newsletter was compiled by markets reporter Hardika Singh in New York. Send your tips, suggestions and feedback to [hardika.singh@wsj.com].

This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

October 02, 2024 07:15 ET (11:15 GMT)

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