A rally in stocks waned shortly after two Federal Reserve officials signaled that interest rates could top 5% just as swap markets were showing traders betting on a peak below that mark.
(Bloomberg) — A rally in stocks waned shortly after two Federal Reserve officials signaled that interest rates could top 5% just as swap markets were showing traders betting on a peak below that mark.
The S&P 500 remained slightly above the key 3,900 level, but pared an advance that reached almost 1.5% after Fed Bank of San Francisco President Mary Daly said she expects the central bank to raise rates to somewhere over 5%. Her Atlanta counterpart Raphael Bostic noted that policymakers should hike above 5% by early in the second quarter and then go on hold for “a long time.”
“In addition to the probability of interest rates remaining high and a possible economic slowdown, any bullishness triggered by slowing inflation may be offset by stocks still-high valuations and overly optimistic earnings expectations,” said Chris Larkin at E*Trade from Morgan Stanley. “It could be a recipe for choppy near-term and long-term trading as traders prepare this week for their first look at earnings and inflation data of 2023.”
Indeed, investors are eagerly awaiting the US CPI report that will come out nearly a week after the latest jobs data showed that wage growth has decelerated. The figures will be among the last such readings policy makers will see before their Jan. 31-Feb. 1 gathering.
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“With all eyes on this week’s CPI report, corporate earnings season, and next month’s Fed meeting, we expect volatility to return, though the pendulum is more likely to swing from negative to positive given near-universal levels of pessimism,” said Mark Hackett, chief of investment research at Nationwide. “Investors should avoid overreacting to large market moves as elevated volatility is our new normal.”
Morgan Stanley’s Michael Wilson said that while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are indeed still too high. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.
Still, the rising threat of an economic recession has done nothing to dissuade Corporate America from spending big on its own shares. American firms announced a record $1.26 trillion of buybacks in 2022, up 3% from a year ago, according to data compiled by Birinyi Associates.
Elsewhere, the MSCI Emerging Markets Index was set to enter a bull market after surging over 20% from its October low. The dollar slumped against most of its major peers and headed toward its weakest since June. Treasury 10-year yields also retreated, approaching 3.5%.
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Key events this week:
- US wholesale inventories, Tuesday
- Fed Chair Jerome Powell among speakers at Riksbank symposium in Stockholm, Tuesday
- World Bank expected to release global economic prospects report, Tuesday
- ECB Governing Council members speak at Euromoney conference in Vienna, Wednesday
- US CPI, initial jobless claims, Thursday
- St Louis Fed President James Bullard at Wisconsin Bankers Association virtual event, Thursday
- Richmond Fed President Thomas Barkin speaks at VBA/VA Chamber, Thursday
- China trade, Friday
- US University of Michigan consumer sentiment, Friday
- Citigroup, JPMorgan Chase, Wells Fargo report earnings, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.5% as of 2:38 p.m. New York time
- The Nasdaq 100 rose 1.5%
- The Dow Jones Industrial Average was little changed
- The MSCI World index rose 1.1%
Currencies
- The Bloomberg Dollar Spot Index fell 0.7%
- The euro rose 1% to $1.0748
- The British pound rose 0.9% to $1.2199
- The Japanese yen rose 0.4% to 131.58 per dollar
Cryptocurrencies
- Bitcoin rose 2.2% to $17,336.29
- Ether rose 5% to $1,333.32
Bonds
- The yield on 10-year Treasuries declined five basis points to 3.51%
- Germany’s 10-year yield advanced two basis points to 2.23%
- Britain’s 10-year yield advanced five basis points to 3.53%
Commodities
- West Texas Intermediate crude rose 1.2% to $74.69 a barrel
- Gold futures rose 0.4% to $1,878.10 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Vildana Hajric, Isabelle Lee and Peyton Forte.
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