Global stocks took another leg down during the early part of Thursday's session, sliding to one-week lows in the wake of Wednesday's unexpectedly market-moving FOMC minutes which confirmed the Fed was on track to raise interest rates several times this year, sending bond yields to new multi-year highs amid prospects for 4 rate hikes on deck (and according to Goldman, even 5 possible).

However, after sliding initially, S&P futures have since staged a rebound, rising as much as 20 points from session lows, and are currently back in the green, modestly above 2,700.

The rebound was helped by the end of the USD rally, as the dollar’s boost following the Fed minutes proved short-lived as the U.S. currency struggled to gain for a fifth day. Meanwhile, the euro was unfazed by a miss in German IFO data, finding support from broad dollar selling after the London open in a rather slow session. The dollar weakness sent EURUSD back to 1.23, while GBP underperforms after a disappointing GDP revision and the ongoing Brexit saga

In other key FX pairs, per BBG:

• USD/JPY declines 0.4% as a slide in local stocks spurs demand for haven assets
• EUR/USD edges up; premium to hedge political risks rising, with two-week smile flattening as demand for low-delta puts remains strong amid higher volatility in the front end
• GBP/USD resumes its slide, trades 0.2% lower, after data showed that the U.K. economy expanded less than previously estimated in 4Q as consumers and businesses absorbed faster price increases

Three rate rises are now almost fully priced in for 2018, compared with two as recently as December, and some analysts are even contemplating the possibility of as many as five rate hikes in 2018.

And while 10Y TSY yields have traded rangebound within 2 bps of 2.93%, German bunds have unwound the sell-off seen post-FOMC Minutes, following disappointing German IFO data after Wednesday’s weaker-than-forecast European PMIs.The “transatlantic spread” between German and U.S. 10-year borrowing costs widened to near a year high at 220 bps, reflecting the diverging monetary policy expectations between the two countries.

The 3% level on 10Y TSY yields is seen as a huge psychological milestone for bulls and bears alike. In the meantime though the yield, which hit four-year highs around 2.96 percent after the minutes, retreated to 2.93%. Two-year yields touched new nine-year peaks.

A break in the U.S. 10- year treasury above the psychological level of 3% may prove sufficiently attractive to spur demand among foreign investors. This would support the dollar against CEEMEA currencies, Rabobank EMFX strategist Piotr Matys writes in a note to clients.

The next hurdle for markets will be minutes from the European Central Bank’s last meeting at 1230 GMT, with investors keen to see if there was more talk of an eventual unwinding of stimulus. One school of thought says that shifting perceptions about the ECB’s policy outlook had a significant role to play in the surge in U.S. Treasury yields that began in September and picked up speed last month, roiling global stocks.

European equities followed Asia peers lower: the Stoxx Europe 600 Index slid as all the major national equity gauges in the region fell. In terms of sector specific moves, material names modestly lag their peers following price action in the complex as well as a disappointing earnings update from Anglo American (-4%) which has sent their shares near the bottom of the FSTE 100; with the index also hampered by lacklustre earnings from the likes of British American Tobacco (-4.6%), Barratt Developments (-4.0%) and BAE systems. However, losses for UK stocks have been capped by a well-received earnings report from Barclays (+5.1%) which allied with upside in AXA shares (+1.2%) post-earnings has also supported the financial sector.

Earlier in Asia most shares retreated, though China’s market bucked the trend as it reopened after a holiday. The Nikkei (-1.1%) and Hang Seng (-1.5%) saw losses of over 1%, while ASX 200 (+0.1%) saw initial 0.4% gains trimmed, with price action in Australia largely dictated by the slew of earnings.

“The market is pricing in the possibility of a tighter Fed over time,” Evan Brown, director at UBS Asset Management, who previously worked on the open market trading desk at the New York Fed, told Bloomberg TV in New York. On a day-to-day basis “you’re going to see volatility, you’re going to see equities get a little skittish when yields are rising, but as you look over the long term, fundamentals on the economy are very strong.”

However, for now Bloomberg notes that markets remain fragile as February is shaping up as one of the worst months for global equities in more than a year as concerns about a pick-up in inflation and expensive stock prices outweigh evidence of a buoyant U.S. economy. With recent data underpinning the view that inflation is no longer lagging, the OIS space shows traders pricing in just shy of three U.S. rate hikes over the next 12 months.

Elsewhere, gold retreated alongside most commodities.  WTI and Brent crude trade lower albeit off worst levels after falling victim to the firmer USD despite last night’s unexpected build in the API report. As a reminder, due to the President’s Day Holiday on Monday the weekly DoE report will be released today. In metals markets, gold prices have also been hampered by the firmer USD, however, the move to the downside has perhaps been contained due to the price action seen in EU stocks this morning. Elsewhere, steel prices were seen lower during Asia-Pac trade as Chinese participants slowly returned from holiday, with a bulk of the market not expected to fully return until next week.

Bulletin headline summary from RanSquawk

• European equities (-1%) have kicked the session off on the back-foot as European participants digest the fall-out of yesterday’s FOMC minutes
• The DXY has nailed 90.000 with the aid of hawkish FOMC minutes, but Usd/Jpy continues to buck the broader trend amidst the ongoing global stock market retracement
• Looking ahead, highlights ECB minutes, US weekly jobs, DoEs and a slew of speakers

Market Snapshot

• S&P 500 futures down 0.3% to 2,691.50
• MSCI Asia Pacific down 0.8% to 175.69
• MSCI Asia Pacific ex Japan down 1% to 575.54
• Nikkei down 1.1% to 21,736.44
• Topix down 0.9% to 1,746.17
• Hang Seng Index down 1.5% to 30,965.68
• Shanghai Composite up 2.2% to 3,268.56
• Sensex unchanged at 33,846.31
• Australia S&P/ASX 200 up 0.1% to 5,950.88
• Kospi down 0.6% to 2,414.28
• STOXX Europe 600 down 0.9% to 377.57
• German 10Y yield fell 0.9 bps to 0.712%
• Euro up 0.02% to $1.2286
• Brent Futures down 0.6% to $65.00/bbl
• Italian 10Y yield fell 2.0 bps to 1.78%
• Spanish 10Y yield fell 1.2 bps to 1.501%
• Brent Futures down 0.6% to $65.00/bbl
• Gold spot down 0.1% to $1,322.89
• U.S. Dollar Index up 0.07% to 90.06

Top Overnight News

• Fed’s Quarles says the natural rate of interest is increasing in the U.S. and that the economy is in the best shape that it has been since the crisis
• U.K. GDP growth in 2017 was revised down to 1.7% from 1.8%, the weakest since 2012, as price rises led to household budgets being squeezed leading to slowing growth in a number of consumer-facing industries
• U.K. Prime Minister Theresa May will shut her most senior cabinet ministers away in a room until late Thursday night in an effort to force them to agree what kind of Brexit they want. But officials warn in private that the most divisive decisions may get kicked down the road
• The U.S. Treasury Department sold $35 billion of five-year notes at a yield of 2.658 percent. Bid/cover ratio fell to 2.44 from 2.48, indicating weaker demand
• U.S. central bankers sent a strong message Wednesday that an expansion with “substantial underlying economic momentum” could sustain more rate hikes; Treasuries sold off aggressively into the 3pm ET settlement as gains sparked by minutes of FOMC’s Jan. 31 meeting were quickly faded
• Federal Reserve Bank of Minneapolis President Neel Kashkari said the central bank’s symmetric approach to its 2% inflation target means “the math says we should be able to tolerate 2.5 percent for five years,” after running at 1.5 percent for five years
• Euro bulls are struggling to push the currency above $1.25 this year, just as the $1.20 level proved a blocking point in 2017
• Do 10-year Treasury yields hit 3 percent and retreat, or does positioning signal a sharp move higher? Open interest on 10-year Treasury futures suggests 3 percent may not be the crucial level after all

Asian markets trading broadly in the red with exception of the Shanghai Comp (+2.2%) which outperforms areparticipants plays catch up from their elongated break. The prospect of ‘further’ gradual rate hikes as noted in the most recent FOMC minutes boosted speculation that 4 rate hikes could be on the table particularly that these minutes were before the strong wage data in the most recent NFP and inflation data last week, which had subsequently pushed bond yields higher with the US 10yr yield hitting 2.95%, while equities slumped late in the US session. This transpired in Asia, with the Nikkei (-1.1%) and Hang Seng (-1.5%) seeing losses of over 1%, while ASX 200 (+0.1%) saw initial 0.4% gains trimmed, with price action in Australia largely dictated by the slew of earnings. In credit markets, the belly of the curve underperformed, with JGB 10yr yields tracking UST yields higher, while a firm 20yr JGB auction supported longer dated debt. Japan PM Abe Adviser Hamada says the BoJ should consider buying foreign bonds.PBoC sets CNY mid-point at 6.3530 (Prev. 6.3428).

Top Asian News

• China’s VIX Stops Updating Amid Government Scrutiny of Options
• Indonesia Sees Jump in 10-Year Bond Yield as ‘Temporary’
• India Releases Plan to Strengthen State Telecom Cos; MTNL Surges
• China Junk Bonds Show More Resilience on Local Investor Support
• Sembcorp Marine Extends Loss by Most Since 2008 After Earns Miss

European equities (-1%) have kicked the session off on the back-foot as European participants digest the fall-out of yesterday’s more hawkish than anticipated FOMC minutes which saw rate-setters take a confident view on the growth and inflation outlook. In terms of sector specific moves, material names modestly lag their peers following price action in the complex as well as a disappointing earnings update from Anglo American (-4%) which has sent their shares near the bottom of the FSTE 100; with the index also hampered by lacklustre earnings from the likes of British American Tobacco (-4.6%), Barratt Developments (-4.0%) and BAE systems. However, losses for UK stocks have been capped by a well-received earnings report from Barclays (+5.1%) which allied with upside in AXA shares (+1.2%) post-earnings has also supported the financial sector.

Top European news

• Neo-Fascist Beaten to a Pulp in Sicily: Italy Campaign Trail
• HSBC Chairman Is Said to Prepare Board Reduction: Sky
• Fosun Buys Controlling Stake in Lanvin
• FCA Probing Barclays Bank’s Treatment of Clients in Default
• German Business Confidence Slips as Companies Face Bottlenecks

In currencies, the DXY has nailed 90.000 with the aid of hawkish FOMC minutes, but Usd/Jpy continues to buck the broader trend amidst the ongoing global stock market retracement and heightened volatility. Flow-wise, heavy supply at and just ahead of 108.00 is still capping the pair, while 108.02 represents Fib resistance and the headline looks increasingly toppy given lower peaks since the recent 107.90 high. Hence, the broader Dollar and index is struggling to maintain gains and mount a challenge of the next upside technical objective at 90.886 despite reclaiming more lost ground vs other G10 rivals. Eur/Usd has lost grip of the 1.2300 handle and could see more downside on the back of a significantly weaker than expected German Ifo survey, especially as the technical picture also looks bearish below its 1.2319 Fib level and with little in the way of support until 1.2206. Cable is testing bids under 1.3900 amidst latest Brexit-related UK political accusations aimed at PM May, but holding above chart support seen around 1.3830. As per the single currency, Sterling may be prone to further losses in wake of a data miss as UK Q4 GDP was downgraded on zero business investment during the quarter (again likely as a result of Brexit). Elsewhere, Usd/majors fairly flat as the DXY hovers just above the 90.000 level.

In the commodities complex, WTI and Brent crude trade lower albeit off worst levels after falling victim to the firmer USD despite last night’s unexpected build in the API report. As a reminder, due to the President’s Day Holiday on Monday the weekly DoE report will be released today at the rescheduled time of 1600GMT. In metals markets, gold prices have also been hampered by the firmer USD, however, the move to the downside has perhaps been contained due to the price action seen in EU stocks this morning. Elsewhere, steel prices were seen lower during Asia-Pac trade as Chinese participants slowly returned from holiday, with a bulk of the market not expected to fully return until next week.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 230,000, prior 230,000; Continuing Claims, est. 1.93m, prior 1.94m
• 10am: Leading Index, est. 0.7%, prior 0.6%
• 11am: Kansas City Fed Manf. Activity, est. 18, prior 16
• 10am: Fed’s Dudley to Speak at New York Fed Briefing on Puerto Rico
• 12:10pm: Fed’s Bostic Speaks at Banking Conference in Atlanta
• 3:30pm: Fed’s Kaplan Speaks on Trade Panel in Vancouver

DB's Jim Reid concludes the overnight wrap

The main thing that jumped yesterday was US yields after the FOMC minutes. Not long after the release yields were actually flat and the S&P 500 up around 1%. However then 10 yr US yields reacted and rose 6bps to 2.951% and the S&P 500 closed -0.55% - the lowest level in a week.

The minutes indicated that “a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate”. On the economy, it noted that “a number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to …the December meeting” and that “several others suggested that the upside risks to the near-term outlook for economic activity may have increased.” On inflation,"almost all participants who commented agreed that a Phillips curve type inflation framework remained useful…”. Elsewhere, some participants said that they saw an appreciable risk that inflation would continue to fall short of the Fed’s objective, but overall inflation is expected to “move up” this year and stabilise around 2% over the medium term. On wage gains, “a number of participants judged that the continued tightening in labour markets was likely to translate into faster wage increases at some point”.

Notably, the relatively hawkish minutes was before the January wage growth and CPI / PPI prints, so it seems reasonable to assume that if the Fed was getting more confident in their growth and inflation outlook at their meeting,the subsequent data releases would have only added to their views.

Staying in the US, the flash February PMIs were all above market, with the composite PMI at 55.9 (vs. 53.8 previous), services at 55.9 (vs. 53.7 expected) and manufacturing PMI at 55.9 (vs. 55.5 expected). Conversely, Europe’s flash PMIs were a fair bit below expectations but remain at solid levels. The Euro area’s composite PMI came in at 57.5 (vs. 58.4 expected), while the services PMI was 56.7 (vs. 57.6 expected) and manufacturing PMI at 58.5 (vs. 59.2 expected).

Across the region, Germany’s composite PMI was 57.4 (vs. 58.5 expected) and France’s composite PMI was 57.8 (vs. 59.2 expected), with both countries’ services and manufacturing PMI also lower than expectations.

Given the weaker European PMI numbers yesterday I made a point of speaking to our head Euro Economist Mark Wall last night about his views on them. He was relatively relaxed as his forecasts always assumed some moderation in growth which the PMIs would have to eventually acknowledge if he were to be correct. He said that the momentum in recent months was implying 0.9% qoq GDP growth compared to a DB forecast of 0.6% qoq in H1. Yesterday’s numbers narrows these upside risks in H1. In H2 he continues to see a loss of momentum as capacity bites, credit conditions get capped and competitiveness erodes, etc.

He does think the recent financial conditions shock was too fleeting to believe it was the obvious culprit for the weaker numbers though. Even at 0.6%, GDP growth is above trend and despite the weaker PMIs, Mark believes that capacity will continue to be absorbed and the economy tighten. In fact he cited the fact that PMI delivery times lengthened in February, implying a further acceleration in underlying PPI inflation over the next 6-9 months and potential upside risks to inflation in H2.

Turning to news on the Brexit transition period where the EU had previously suggested an end date of December 2020. However, according to a draft UK government legal proposal obtained by Bloomberg, it suggests the actual date may be up for some debate. The document indicated “the UK believes the period’s duration should be determined simply by how long it will take to prepare and implement the new processes….that will underpin the future partnership” and that “the UK agrees this points to…around two years, but wishes to discuss with the EU the assessment that supports its prosed end date”. Later on, the Chief of Staff for Brexit Secretary Mr Jackson noted the UK has not changed its transition plans, which is “around two years”. Elsewhere, the EC’s Juncker “still believes that (both sides) should be able to agree (on the withdrawal agreement) by October and agree on the final terms…”

Staying in the UK, the December unemployment rate edged up from its c42 year low and rose for the first time since July last year to 4.4% (vs. 4.3% expected), while the average weekly earnings growth was in line and steady mom at 2.5% yoy. Speaking in front of the Treasury Committee, the BOE’s Haldane noted “…the pick-up in wages is starting to take root” and that “intelligence from our agents suggests wage settlements this year were going to pick up, perhapswith a number with a three in front of it….” Further, he added risks for the UK economy were “to the upside”.

Elsewhere, the BOE Governor Carney reiterated that cash rates need to rise in the “coming months” but it would be ‘gradual and limited” and refrained from providing guidance on potential timing. The implied Bloomberg odds of a May rate hike rose c4ppt to 61.5%.

This morning in Asia, markets are broadly lower with the Nikkei (-1.25%), Hang Seng (-0.98%) and Kospi (-0.58%) all down as we type. Elsewhere, UST 10y yield is down c1bp while the three key Chinese bourses are up 1.8%-2.1% after trading resumed following the New Year holidays.

Now recapping other market performance from yesterday. US bourses reversed earlier gains to close modestly lower (S&P -0.55%; Dow -0.67%; Nasdaq -0.22%). Within the S&P, all sectors fell with losses led by the real estate, energy and telco stocks. European markets were mixed but little changed as they closed well before the FOMC minutes were released. The Stoxx 600 edged up 0.16% while the FTSE rose 0.48% but the DAX dipped 0.14%. The VIX fell for the first time in three days to 20.02 (-2.8%).

Over in government bonds, core European 10y bond yields fell 1-3bp (Bunds & OATs -1.3bp; Gilts -3.1bp), with the latter partly impacted by the unemployment print. In the US, the treasury sold $35bn of five year notes at a yield of 2.658% with a bid-to-cover ratio of 2.44x (vs. 2.48x previous). Elsewhere, the UST 2y, 5y, 10y yields rose 4.7bp, 4.1bp and 6bp respectively. Turning to currencies, the US dollar index rose for the third trading day (+0.47%), while the Euro and Sterling fell 0.43% and 0.56% respectively. In commodities, WTI oil rose 0.39% to $61.79/ bbl while precious metals were little changed (Gold -0.34%; Silver +0.36%).

Away from the markets and onto three Fed speakers overnight. The Fed’s Kashkari said “Wall Street overreacts to everything….we can’t make policy based on market blips up and down”. On rates, he noted, “we debate each word change in the (FOMC) statement…a lot of debate goes into those…and I think (the word) “further” (in the last statement) was intended to say continuing the current path we’re on”. Elsewhere, the Fed’s Harker reiterated his views of two rate hikes in 2018 and unemployment falling to 3.6% by mid-2019 while the Fed’s Kaplan reaffirmed his call for “gradual and patient” tightening and expects an unemployment rate of 3.6% by year end. Notably, none of the three speakers are policy voters this year.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the January existing home sales was below expectations at 5.38m (vs. 5.6m) and down 4.8% yoy. Notably, the number of homes available for sale fell 9.5% yoy, partly continuing the upward pressure on home prices where the median selling price was up 5.8% yoy. Elsewhere, the UK’s January public sector net borrowing was broadly in line at -£11.6bln (vs. - £11.4bln expected).

Looking at the day ahead, the February confidence indicators and the final January CPI report in France are due, followed by the Germany's IFO survey for February and the second estimate of Q4 GDP in the UK. In the US, data releases include initial jobless claims, the January leading indicators index and the February Kansas City Fed manufacturing activity index print. Japan's CPI report for January will be out in the late evening. Away from the data, the Fed's Dudley and Bostic are due to speak.