Wall Street got more signs the Federal Reserve’s war against inflation isn’t breaking the economy — or at least not yet — with traders sending Treasury yields soaring amid bets on further tightening.
(Bloomberg) — Wall Street got more signs the Federal Reserve’s war against inflation isn’t breaking the economy — or at least not yet — with traders sending Treasury yields soaring amid bets on further tightening.
Bonds sold off across the curve, with two-year yields jumping 16 basis points to 4.87%. Swap markets now indicate a 50% chance of a second Fed hike by year-end. The dollar climbed. The S&P 500 wavered, with the stock market facing more instability as traders adjust their positions at the end of the quarter.
Financial companies led gains as the biggest lenders passed the Fed’s stress test, clearing the way for payouts. Wells Fargo & Co. and JPMorgan Chase & Co. rallied over 3%. The Nasdaq 100 underperformed, with losses in giants Microsoft Corp. and Nvidia Corp dragging down the gauge. Micron Technology Inc. slid on concern that it faces a slow recovery from an inventory glut.
Thursday’s readings on jobless claims and the gross domestic product showed the US economy is in better shape than many had envisioned at the start of 2023. While key gauges of inflation closely watched by the Fed have been revised down, they still remain well above the central bank’s 2% target.
“The market is processing the recent strength in the economic data in both positive and negative ways,” said Carol Schleif, chief investment officer at BMO Family Office. “Solid economic data means that the economy is more resilient, but it also emboldens the Federal Reserve to keep raising interest rates.”
‘Haunt Investors’
Schleif notes that it’s very plausible that the Fed boosts interest rates in July — and perhaps again in September — especially if the economic data remains strong and if second-quarter earnings are better than expected.
In fact, those rate bets are aligning with Fed Chair Jerome Powell’s view that at least two hikes are likely necessary this year — and that acting at consecutive policy meetings isn’t “off the table.”
To Fawad Razaqzada at City Index and Forex.com, the fact that the economy continues to defy expectations should keep the doves at the Fed quiet for another couple of months at least.
“But the potential for interest rates to remain higher for longer is something that could ultimately haunt investors,” he noted.
After Thursday’s data came out, the bond market showed a deeper curve inversion — with longer-dated Treasury yields rising less than shorter ones.
That means: the economy may look stronger now, but investors expect the Fed’s rate increases to curb future growth, which could just boost the risk of a recession down the road.
Climbing a Wall of Worry
Despite all the jitters around a potential downturn and elevated inflation, the S&P 500 is about to wrap up the first half of 2023 with a rally of 14%.
And history suggests the bullish momentum could continue according to Adam Turnquist, chief technical strategist at LPL Financial. Since 1950, first-half gains of 10% or more have been followed by an average rally of 7.7% in the second half — with positive results 82% of the time.
While there could be some bumps along the way, the good news is that drawdowns in the second half tend to be shallower after a positive first half and a pullback in stocks could provide investors “a buying opportunity into this new bull market,” Turnquist added.
Key events this week:
- China manufacturing PMI, non-manufacturing PMI, balance of payments, Friday
- US personal income and spending, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.1% as of 2:13 p.m. New York time
- The Nasdaq 100 fell 0.5%
- The Dow Jones Industrial Average rose 0.5%
- The MSCI World index was little changed
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.4% to $1.0870
- The British pound fell 0.2% to $1.2612
- The Japanese yen fell 0.3% to 144.86 per dollar
Cryptocurrencies
- Bitcoin rose 1.4% to $30,519.45
- Ether rose 1% to $1,849.15
Bonds
- The yield on 10-year Treasuries advanced 14 basis points to 3.85%
- Germany’s 10-year yield advanced 10 basis points to 2.42%
- Britain’s 10-year yield advanced seven basis points to 4.38%
Commodities
- West Texas Intermediate crude rose 0.3% to $69.80 a barrel
- Gold futures fell 0.4% to $1,915.20 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Brett Miller, Sujata Rao, John Viljoen, Peyton Forte and Carly Wanna.
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