US stocks and bonds slumped on Friday as inflation remained top of mind and traders wagered at least one, possibly two, more interest rate increases could be in store from the Federal Reserve this year.
(Bloomberg) — US stocks and bonds slumped on Friday as inflation remained top of mind and traders wagered at least one, possibly two, more interest rate increases could be in store from the Federal Reserve this year.
The Nasdaq 100 fell 0.9% as swaps traders started to price in a second rate increase in June, that’s in addition to a more widely expected one in May. The tech-heavy gauge is on track for its second weekly loss in a row, the longest such losing streak for the benchmark this year. The S&P 500 slid, trimming its weekly advance as policy-sensitive technology names dragged on the benchmark.
Treasury yields rose, with the rate-sensitive two-year jumping 13 basis points to trade around 4.1%, a weekly high, after a measure of March retail sales showed core readings declined less than estimated and comments from Fed officials suggested more tightening ahead. A Bloomberg gauge of the dollar climbed while gold futures tumbled.
Equities were rattled after Fed Governor Christopher Waller said he favored more policy tightening in the central bank’s battle with inflation. His comments further fueled hawkish bets after a Reuters report indicated Atlanta Fed President Raphael Bostic was calling for a quarter-point increase at the May meeting followed by a pause.
“The problem for many investors right now is that it’s still possible to construct fairly divergent narratives about the economy depending on which series you look at,” wrote a Deutsche Bank team led by Henry Allen. “For instance, yield curves have inverted, temporary jobs are declining, and on previous occasions when the Fed have hiked this fast and this quickly, a recession has followed shortly afterwards.”
On the other hand, the bank’s strategists added, “you could point to unemployment around its lowest in decades, a high level of vacancies by historic standards, financial markets that have mostly shrugged off the SVB-related turmoil by now, along with growing signs that inflation is softening and the Fed are nearing a pause in their rate hikes.”
Financials were the only sector advancing Friday after JPMorgan Chase & Co. and Citigroup Inc. kicked off earnings season. Assurances about the sector’s health and an increase in deposits following the March failures of three smaller US lenders is driving the big banks higher. Regional peers slid.
The sector will remain in the hot seat Monday when Charles Schwab Corp. and State Street Corp. report. Investors will be looking for signs of health from Schwab, which has plunged roughly 40% this year as rising rates drove a spike in unrealized losses at the brokerage.
While data earlier this week suggested runaway prices were moderating somewhat, a Friday report suggested Americans are pessimistic. Inflation expectations jumped in April with consumers seeing prices climbing 4.6% on an annual basis, up from 3.6% in March, according to a University of Michigan survey.
“Inflation in our minds clearly peaked last summer and has continued to improve. But the caveat is that we’re still a ways away from the Fed target,” Philip Orlando, chief equity market strategist and head of client portfolio management at Federated Hermes said of the central bank’s 2% inflation goal. “The Fed, once they do that last hike, in all likelihood is going to go on pause. And we think a pause is going to last a while, likely into next year.”
A hold on rates could draw investor focus back to the debate over an economic downturn and whether the market has a hard or soft landing in store.
“We started the year off with pretty solid data. Now we’re getting a payback into March,” Ethan Harris, head of global economic research at BofA Securities told Bloomberg Television after the retail sales report. “And so the question is: is this the beginning of that slide into recession? I’m leaning in that direction. I think that there’s some fundamental weakening going on in the economy.”
In commodities, crude is headed for a fourth week of gains amid signs of a tightening global market while gold is on track for its worst week since February. Bitcoin wavered between gains and losses but held above the key $30,000 level which it broke above earlier in the week.
Some of the main moves in the market:
Stocks
- The S&P 500 fell 0.7% as of 1:47 p.m. New York time
- The Nasdaq 100 fell 0.9%
- The Dow Jones Industrial Average fell 0.8%
- The MSCI World index fell 0.5%
Currencies
- The Bloomberg Dollar Spot Index rose 0.5%
- The euro fell 0.5% to $1.0987
- The British pound fell 0.9% to $1.2407
- The Japanese yen fell 0.9% to 133.71 per dollar
Cryptocurrencies
- Bitcoin fell 0.1% to $30,241.21
- Ether rose 3.2% to $2,072.65
Bonds
- The yield on 10-year Treasuries advanced eight basis points to 3.52%
- Germany’s 10-year yield advanced seven basis points to 2.44%
- Britain’s 10-year yield advanced nine basis points to 3.67%
Commodities
- West Texas Intermediate crude rose 0.6% to $82.63 a barrel
- Gold futures fell 1.9% to $2,016.60 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Isabelle Lee and Edward Bolingbroke.
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