US stocks were mixed and the two-year Treasury yield added more than 10 basis points after data showed that inflation remains elevated. In the aftermath, two Federal Reserve officials warned that the remedy could mean higher interest rates for a long period of time, but one policymaker suggested the finishing line might be in sight.
(Bloomberg) — US stocks were mixed and the two-year Treasury yield added more than 10 basis points after data showed that inflation remains elevated. In the aftermath, two Federal Reserve officials warned that the remedy could mean higher interest rates for a long period of time, but one policymaker suggested the finishing line might be in sight.
Swaps contracts showed investors now give near-even odds for a quarter-point rate increase by the Fed in June, following similar hikes in March and May. The rate-sensitive two-year Treasury yield rose past 4.6%. It has surged this month, driven by a blowout jobs report and Fed officials making it clear that they intend to push rates toward 5%.
After the CPI data was released, Federal Reserve Bank of Richmond President Thomas Barkin told Bloomberg TV that the central bank might “have to do more”to fight inflation, while Dallas Fed President Lorie Logan said rate increases could continue “for a longer period than previously anticipated.”
But stocks pared losses in the afternoon as Federal Reserve Bank of Philadelphia President Patrick Harker said in a speech that policymakers were nearing the point where rates were restrictive enough: “In my view, we are not done yet … but we are likely close.”
“Stocks are probably rising due to Harker,” said Steve Sosnick, chief strategist at Interactive Brokers. “Close to done on tightening is vague, but certainly not a hawkish tone.”
Inflation’s stickiness could be seen in egg prices, which rose 8.5% in January, and in record-high monthly payments for a new car. Yet equity bulls clung to one CPI component that Federal Reserve Chair Jerome Powell has singled out as a must-watch: The so-called super-core figure, or core services minus housing, came in at a slower 0.3% pace in the month.
“Bulls will point to the fact that the big driver remains Shelter, which should start to come down quickly in the second half of the year,” Chris Senyek of Wolfe Research wrote. “Bears will point to Used Car prices and other items that have driven recent ‘disinflation’ starting to turn back up.”
But Win Thin, currency strategist at Brown Brothers Harriman, wasn’t buying the super-core argument.
“If the market and the Fed have to get THIS granular to somehow weave an inflation argument, then they’ve lost the argument,” he wrote in a text. “Core core core core inflation? C’mon man!”
Here is what other Wall Street analysts were saying:
Michael Contopoulos, head of fixed income at Richard Bernstein Advisors:
“If you think inflation is going to stick around for a while, as we do, then it also means the Fed needs to continue to hike until they really destroy demand. This means they need to crack labor. If you crack labor, long term growth and inflation expectations need to fall as a ‘hard landing’ scenario becomes more likely.”
Brian Nick, chief investment strategist at Nuveen:
“The Fed has won every single one of these battles over the last 18 months — every time the markets have tried to price out or discount the Fed’s rhetoric or their forecasts, the markets have basically lost that fight, they’ve lost that game of chicken.”
Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors:
“We continue to forecast inflation will rapidly decline as the BLS slowly reflects the reality of housing deflation in their estimate of shelter inflation. This lag is approximately 12 months, so second half inflation numbers should come down rapidly.”
John Plassard, investment specialist at Mirabaud:
“It’s the seventh month in a row of inflation going lower, the disinflation narrative is not threatened — on the contrary. It must be said there were some worries around a bad surprise so this is reassuring before the next meeting of the Fed.”
Mark Dowding, chief investment officer at BlueBay Asset Management:
“When data are in-line, there’s more information to be gleaned from how markets react to this than what the actual number was. The price action today could set the tone for the coming week. Our own view is that yields are more likely to head higher as we think the Fed remain hawkish for the time being. This poses a headwind for equities.”
Bank of America Corp.’s latest global fund manager survey suggests that while equity markets are on a relentless march higher amid optimism around stronger economic growth and cooling inflation, most investors aren’t convinced the gains will last.
About 66% of participants in the bank’s February survey said stocks are seeing a bear market rally — signaling they expect them to return to new lows. That’s even as the share of investors expecting a global recession fell to 24%, down from a peak of 77% in November.
The yen rose following the formal nomination of Kazuo Ueda as the next Bank of Japan governor. The pound climbed after figures showed UK wages rose quicker than expected at the end of 2022, heaping pressure on the Bank of England to deliver another interest-rate increase next month. And Turkey prepared to channel billions of liras into its stock market, which will reopen Wednesday after the devastating earthquakes Feb. 6.
Key events:
- New York Fed President John Williams gives the keynote speech at New York Bankers Association event Tuesday
- US retail sales, UK CPI Wednesday
- US jobless claims, Australia unemployment, Cleveland Fed President Loretta Mester speaks at Global Interdependence Center event Thursday
- France CPI, Russia GDP Friday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 1:43 p.m. New York time
- The Nasdaq 100 rose 0.3% to the highest since Feb. 7
- The Dow Jones Industrial Average fell 0.4%
- The MSCI World index rose 0.8%, more than any closing gain since Feb. 7
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.1% to $1.0735
- The British pound rose 0.3% to $1.2178
- The Japanese yen fell 0.5% to 133.02 per dollar
Cryptocurrencies
- Bitcoin surged 2.3%, more than any closing gain since Feb. 1
- Ether surged 4.3%, more than any closing gain since Jan. 29
Bonds
- The yield on 10-year Treasuries advanced five basis points to 3.75%
- Germany’s 10-year yield advanced seven basis points to 2.44%
- Britain’s 10-year yield advanced 12 basis points, more than any closing advance since Feb. 6
Commodities
- West Texas Intermediate crude fell 1.1% to $79.23 a barrel
- Gold futures rose 0.1% to $1,866.10 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Julien Ponthus, Sagarika Jaisinghani, Farah Elbahrawy and Vildana Hajric.
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