5 things to start your day: Europe

Good morning. The US Treasury yield curve touches positive territory. Goldman warns of a stocks correction. And the race to save Thames Wate

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Good morning. The US Treasury yield curve touches positive territory. Goldman warns of a stocks correction. And the race to save Thames Water. Here's what people are talking about.

Turning positive … briefly

A key segment of the US Treasury yield curve briefly turned positive as weaker-than-anticipated labor-market data bolstered bets on steep interest-rate cuts by the Federal Reserve. Treasuries jumped on Wednesday — led by shorter-maturity notes that are more sensitive to monetary policy — after US job openings fell in July to the lowest since the start of 2021. The two-year Treasury note's yield dipped below the 10-year's for only the second time since 2022 as traders built up wagers on a super-sized rate reduction this month. Interest-rate swaps showed they have fully priced in a quarter-point rate cut at the policy meeting this month — and see a more than 30% chance of a half-point reduction. Oaktree Capital Management LP's Howard Marks says US rates will settle in a range of between 3% and 4% after the Fed's reductions. His comments come as economic activity was flat or declining across most regions in the US in recent weeks, according to the Fed's Beige Book survey of regional contacts. For Ye Xie's analysis of the labor market, see below.

Stocks warning

Sticking with the labor data, stocks could be heading for correction if payrolls come in weak on Friday, according to Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs Group Inc. The bank's clients are already positioning for a negative technical setup for share prices in the second half of September, Rubner wrote in a note Wednesday, adding that he expects a risk-off move to begin on Sept. 16. The end of September is historically the worst two-week trading period of the year for the S&P 500, Rubner noted. And this time around, trend-following systematic funds have little room to add equity exposure, while companies are about to head into their earnings buyback blackout periods, further reducing stock market demand.

Oil steadies

Oil steadied near the lowest close since June 2023 as an industry report pointed to a big draw in US crude stockpiles, with the market taking a breather following a sharp selloff this week. Brent traded below $73 a barrel after losing almost 8% since the start of the week. West Texas Intermediate was near $69. The American Petroleum Institute reported crude inventories dropped by 7.4 million barrels, according to people familiar with the data. That would be the biggest decline since June, if confirmed by official figures later Thursday. Crude has tumbled on persistent concerns about the economic outlook in key consumers and expectations of ample supply. Indications that OPEC+ is considering a delay to a planned output boost from October failed to halt the recent slide. Across other commodities, gold was steady, trading in a narrow range around $2,500 an ounce and iron ore futures sank to their lowest since 2022.

Thames Water woes

The UK is making further tweaks to water company insolvency laws as fears grow that debt-laden Thames Water will run out of money next year. It's the first time the new government has hinted that special administration, a form of temporary nationalization, is an increasing possibility for Thames. The UK will crack down on executives heading up companies that leak sewage into rivers and the sea through a new bill introduced to parliament on Thursday. The same legislation updates the special administration regime for water monopolies in England and Wales, according to officials familiar with the plans. The government needs to address sewage spills that have caused widespread public anger and at the same time sort out the tangled mess that Thames Water faces. The company, which provides water to all of London and is seen by the government as too big to fail, must raise £3.3 billion ($4.3 billion) of investor cash. Without that, it has only enough money to last until June.

China losing favor

JPMorgan Chase & Co. abandoned its buy recommendation for Chinese stocks, citing heightened volatility around upcoming US elections in addition to growth headwinds and tepid policy support. China was downgraded to neutral from overweight, strategists led by Pedro Martins wrote in a note Wednesday. The potential for another trade war between Washington and Beijing could weigh on shares in the run up to November's US presidential vote, they warned. Moves by President Xi Jinping's government to help address the country's economic slump continue to be "underwhelming." At the same time, new emerging-market equity funds that exclude China are sprouting up, already matching their annual launch record set last year as investors seek better returns elsewhere. As of Sept. 4, 19 emerging market ex-China equity funds have been launched this year, equal to the total for all of 2023, according to data compiled by Bloomberg.

Coming up

Today's economic calendar includes German July factory orders and August's construction PMI. We also get the UK's August construction PMI and employment changes, followed by US initial jobless claims later in the day. Central bank speakers include the ECB's Holzmann.

What we've been reading

This is what's caught our eye over the past 24 hours. Nvidia says it hasn't been subpoenaed by DOJ in probe Burberry out of FTSE and can't find its way into high fashion Spain chooses government minister Escriva to lead the central bank VW defends plan to shut German factories with plunging sales Italy gets EU nod to extend lucrative beach licences until 2027 Ukraine braces for IMF push to devalue currency, cut rates Daimler Truck names Radstrom CEO in rare German female pick

And finally, here's what Ye Xie is interested in this morning:

A key job market gauge has reached an inflection point that may lead to a faster rise in the unemployment rate, based on Fed Governor Chris Waller's research. That adds to the market's perception that the bar for a 50bps Fed cut has been lowered. Over the past two years, Waller has been arguing the Fed could curb inflation without a recession. His main thesis is that the Fed's tightening can rebalance the labor market by reducing job openings without a significant rise in the unemployment rate. So far, he's been right, defying many who considered such outcome is unlikely. But his research paper with Andrew Figura published in 2022 also showed that once the job vacancy rate falls to the pre-pandemic level of 4.6%, that unemployment would rise to 4.5%. (The jobless rate was 4.3% in July) That line was crossed on Wednesday, when the JOLTS report showed the vacancy rate declined to 4.56% in July, from a peak of 7.4% in March 2022. At Jackson Hole, Powell said further cooling of the labor market would be "unwelcome," suggesting the Fed's focus has now shifted to keeping a lid on the unemployment rate. All that has prompted traders to add a few more basis points to their bets for a bigger September rate cut. Waller will speak about the economic outlook on Sept. 6, just after the payrolls report. That may be the chance for him to set the market's expectations for the pace of cuts before the blackout period starts ahead of the Fed's policy decision due Sept. 18. Ye Xie is a New York-based currency and rates reporter for Bloomberg.

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