US stocks fell with bonds as Federal Reserve Chair Jerome Powell warned that higher rates would be needed to combat inflation, thwarting bets that the US central bank was nearing the end of its tightening cycle.
(Bloomberg) — US stocks fell with bonds as Federal Reserve Chair Jerome Powell warned that higher rates would be needed to combat inflation, thwarting bets that the US central bank was nearing the end of its tightening cycle.
The S&P 500 is poised to slide for the third day, its longest such losing streak since early May. FedEx Corp. tumbled about 2% after the economic bellwether’s outlook fell short of analyst consensus estimates on weakened demand. Two-year Treasury yields, considered most sensitive to interest rates, rose to 4.7%.
Fed Chair Jerome Powell reiterated his warning that higher rates are needed to combat inflation. “We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks,” he said in prepared remarks ahead of his semi-annual report to Congress later this morning.
Policymakers kept interest rates unchanged at their meeting last week, their forecasts imply around two additional quarter-point rate hikes or one half-point increase. Since then, money markets have been attaching roughly 80% odds to a quarter percentage point hike in July.
“The Fed is content to champion the no cuts narrative as the primary messaging,” Ian Lyngen, head of US rates strategy at BMO Capital Markets wrote in a note. “Keeping July and September as live meetings is an effective way of distracting investors from their prior preoccupation with pricing in rate cuts by year end.”
The second-quarter stock rally has hit a wall as investors lose their enthusiasm amid crowded bullish positioning, narrow breadth, stretched valuations, and hawkish Fed signals. Goldman Sachs Group Inc. strategists recommend hedging S&P 500 exposure, even as they forecast the index will climb to 4,700 in 12 months.
“The recent upside breakout in US equities has left many investors scratching their heads in search of fundamental justification,” according to Bank of America strategists including Nitin Saksena. “We see signs of an asset bubble in the making rather than a ‘rational’ rally.”
The dollar edged higher before Powell’s testimony, while the pound fell and Bitcoin rallied.
Key events this week:
- Federal Reserve Chair Jerome Powell delivers semi-annual congressional testimony before the House Financial Services Committee, Wednesday
- Chicago Fed President Austan Goolsbee speaks, Wednesday
- Eurozone consumer confidence, Thursday
- Rate decisions in UK, Switzerland, Indonesia, Norway, Mexico, Philippines, Turkey, Thursday
- US Conference Board leading index, initial jobless claims, current account, existing home sales, Thursday
- Fed’s Powell delivers testimony before the Senate Banking Committee, Thursday
- Cleveland Fed’s Loretta Mester speaks Thursday
- Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI, Friday
- Japan CPI, Friday
- US S&P Global Manufacturing PMI, Friday
- St. Louis Fed President James Bullard speaks, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.3% as of 9:33 a.m. New York time
- The Nasdaq 100 fell 0.3%
- The Dow Jones Industrial Average fell 0.4%
- The Stoxx Europe 600 fell 0.5%
- The MSCI World index fell 0.4%
Currencies
- The Bloomberg Dollar Spot Index rose 0.1%
- The euro was unchanged at $1.0918
- The British pound fell 0.4% to $1.2714
- The Japanese yen fell 0.5% to 142.11 per dollar
Cryptocurrencies
- Bitcoin rose 3.1% to $29,045.9
- Ether rose 2.2% to $1,823.72
Bonds
- The yield on 10-year Treasuries advanced four basis points to 3.77%
- Germany’s 10-year yield advanced three basis points to 2.43%
- Britain’s 10-year yield advanced 10 basis points to 4.43%
Commodities
- West Texas Intermediate crude was little changed
- Gold futures fell 0.4% to $1,939.70 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Abhishek Vishnoi, Farah Elbahrawy, Brett Miller and James Hirai.
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