US stocks ended Monday with modest gains after fluctuating for the final stretch of the trading session as investors attempted to come to terms with Federal Reserve policy that could remain restrictive for longer than previously expected.
(Bloomberg) — US stocks ended Monday with modest gains after fluctuating for the final stretch of the trading session as investors attempted to come to terms with Federal Reserve policy that could remain restrictive for longer than previously expected.
The S&P 500 and the Nasdaq 100 bounced back after a dismal week for Wall Street. The 10-year Treasury yield slid to hover around 3.92%. A dollar index retreated.
Among individual stock movers, Union Pacific Corp. was the best performer within the S&P 500 on Monday after saying it would replace its CEO this year amid pressure from a prominent shareholder. Zoom Video Communications Inc. rose in late trading after giving an upbeat profit forecast for the current period.
Investors have recently been recalibrating their forecasts for where rates will end up, given signs that inflation hasn’t been moderating as the Fed expects. Traders are pricing US rates to peak at 5.4% this year, compared with about 5% just a month ago. Fed Governor Philip Jefferson firmly standing by the central bank’s 2% inflation goal on Monday kept investors on the edge.
“We have had a bit of a repricing in markets in February where there is more concern that central banks will have more work to do,” Sam Lynton-Brown, global head of macro strategy at BNP Paribas, said on Bloomberg Television. “The view we have is that there’s still some further room to run on that repricing. So either equities are at risk to come lower or rates are at risk to head higher.”
In the near-term, both scenarios could play out if the markets price in a more hawkish policy outlook for the Fed, he said.
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Meanwhile, fresh US data that investors contended with on Monday pointed to an economy that remains robust despite the Fed’s persistent rate hikes. US pending home sales rose last month by the most since June 2020, which could keep pressure on the Fed to stay hawkish.
Orders placed with US factories for business equipment also rose in January as companies continued to make longer-term capital investments despite uncertainty about where the economy is headed. And excluding transportation equipment, durable goods orders rose more than expected.
Read More: Traders See US Economy as a Balloon Directed by Multiple Forces
But for now, a more optimistic outlook for earnings estimates is helping ease fears that inflation will remain entrenched even as growth slows, drawing investors back to stocks. Those treading into this market risk are falling into a “bull trap” according to Michael Wilson, chief US equity strategist at Morgan Stanley. That view was echoed by Torsten Slok, chief economist at Apollo Global Management.
“A generation of investors has since 2008 been taught that they should buy on dips, but today is different because of high inflation, and credit markets and equity markets are underestimating the Fed’s commitment to getting inflation down to 2%,” Slok wrote in a note.
The risk-reward for equities remains poor, JPMorgan Chase & Co. strategists led by Marko Kolanovic wrote in a note.
“The risk-reward of holding bonds at this level of short-term yields looks better than equity (earnings yield) than any time since the great financial crisis,” they wrote.
Read More: Fed Doesn’t Care About Wall Street as Much as Wall Street Thinks
Key events this week:
- US wholesale inventories, Conf. Board consumer confidence, Tuesday
- China manufacturing PMI, non-manufacturing PMI, Caixin manufacturing PMI, Wednesday
- Eurozone S&P Global Eurozone Manufacturing PMI, Wednesday
- US construction spending, ISM Manufacturing, light vehicle sales, Wednesday
- Eurozone CPI, unemployment, Thursday
- US initial jobless claims, Thursday
- Eurozone S&P Global Eurozone Services PMI, PPI, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.3% as of 4:01 p.m. New York time
- The Nasdaq 100 rose 0.7%
- The Dow Jones Industrial Average rose 0.2%
- The MSCI World index fell 1.2%
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.6% to $1.0608
- The British pound rose 0.9% to $1.2057
- The Japanese yen rose 0.2% to 136.25 per dollar
Cryptocurrencies
- Bitcoin fell 1% to $23,335.77
- Ether fell 1.1% to $1,624.06
Bonds
- The yield on 10-year Treasuries declined two basis points to 3.93%
- Germany’s 10-year yield advanced four basis points to 2.58%
- Britain’s 10-year yield advanced 15 basis points to 3.80%
Commodities
- West Texas Intermediate crude fell 0.9% to $75.67 a barrel
- Gold futures rose 0.4% to $1,824 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Alice Atkins, Cecile Gutscher, Isabelle Lee and Cristin Flanagan.
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