Volkswacht Bodensee - Markets mixed as US contraction lifts bets on slower Fed hikes

After an extended period of pessimism on trading floors fuelled by soaring inflation and the US central bank's monetary tightening campaign, investors are beginning to speculate that the market may have reached its nadir.

The world's top economy shrank 0.9 percent in April-June following a 1.6 percent retreat in the first quarter as it was buffeted by the four-decade-high spike in inflation and rising borrowing costs.

But the reading was taken as a sign of good news, as it could give the Fed room to take its foot off the pedal, with Treasury yields -- considered a barometer of future interest rates -- easing.

Officials are expected to continue lifting rates, but analysts estimate they will announce a 50-basis-point rise in September, compared with 75 at the past two meetings.

And some analysts said the quick, sharp pace of increases would allow the bank to begin cutting sooner in 2023. Others said any recession would likely only be shallow and short.

The news saw all three main indexes on Wall Street rally more than one percent, with tech firms -- which are susceptible to higher rates -- leading the way.

The gains extended a rally Wednesday that came after Fed chief Jerome Powell hinted that the bank could start to take it easier in its tightening.

Most of Asia followed suit in early trade but struggled to maintain the momentum as the day progressed.

Tokyo, Shanghai, Singapore and Manila all fell. Hong Kong was also buffeted by a tech selloff led by Alibaba as traders grow worried about its upcoming earnings report.

Sydney, Seoul, Mumbai, Taipei, Jakarta and Wellington rose.

- Losing steam -

Paris rose more than one percent at the open after data showed the French economy grew more than expected in the second quarter thanks to a bounce in exports.

London and Frankfurt were also up.

The prospect of US rates not rising as fast as previously expected hit the dollar, which has soared in recent months against most other currencies.

The greenback dropped below 133 yen Thursday for the first time since mid-June, having hit a 24-year high of 139.39 yen just two weeks ago.

A second successive contraction is widely considered a technical recession, though it is not officially considered so in the United States until identified as such by the National Bureau of Economic Research.

But while debate rages over that issue, the consensus is that the economy is struggling.

"The more important point is that the economy has quickly lost steam in the face of four-decade high inflation, rapidly rising borrowing costs, and a general tightening in financial conditions," wrote Sal Guatieri, of BMO Capital Markets.

China is also struggling, hit by painful Covid-induced lockdowns in major cities including Shanghai and Beijing that have hammered all sectors and supply chains.

On Thursday, the country's leadership offered a dour assessment of the world's number two economy but presented no plans to stimulate growth, leaving traders disappointed.

- Key figures at around 0720 GMT -

Tokyo - Nikkei 225: DOWN 0.1 percent at 27,801.64 (close)

Hong Kong - Hang Seng Index: DOWN 2.5 percent at 20,112.34

Shanghai - Composite: DOWN 0.9 percent at 3,253.24 (close)

London - FTSE 100: UP 0.1 percent at 7,353.02

Dollar/yen: DOWN at 132.72 yen from 134.25 yen Thursday

Euro/dollar: UP at $1.0236 from $1.0197

Pound/dollar: UP at $1.2225 from $1.2177

Euro/pound: UP at 83.73 pence from 83.70 pence

West Texas Intermediate: UP 0.7 percent at $97.08 per barrel

Brent North Sea crude: DOWN 0.1 percent at $107.01 per barrel

New York - Dow: UP 1.0 percent at 32,529.63 (close)

G.Schulte--BTB