‘Fed-Friendly’ Data Lifts Bonds as Stocks Suffer: Markets Wrap

(Bloomberg) — Treasuries rose after data highlighted a gradual economic slowdown, fueling speculation that the Federal Reserve will end its most aggressive interest rate hike campaign in decades.

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Two-year yields were headed toward their lowest levels since August, down nine basis points to about 4.8%. After a hot rally that sent the S&P 500 near “overbought” levels, the index struggled. As earnings season comes to a close, traders remain focused on large retail traders. Walmart fell amid a cautious tone about the outlook for consumers, while Macy’s Inc rose. On the back of an earnings beat. Cisco Systems Inc. sank. After bearish expectations. Oil continued to decline amid swelling inventories.

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Continuing claims for unemployment benefits in the United States have risen to their highest level in nearly two years, highlighting the growing challenges unemployed workers face in finding new jobs. Factory production fell more than expected, largely reflecting a decline in strike-related activity at automakers and parts suppliers. Homebuilder sentiment fell to its lowest level this year.

“Monetary policy default is now catching up with the economy – from input costs to industrial production to employment,” said Jamie Cox, managing partner at Harris Financial Group. “Now, the battle is shifting from inflation to maintaining economic growth and avoiding recession. Interest rate cuts are closer than people think – perhaps even as early as March 2024.”

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While it is still too early for the Fed to declare victory over inflation — and interest rate cuts remain a long way off — numbers like the latest one will ease lingering concerns about additional hikes, according to Chris Larkin of Morgan Stanley’s E*Trade.

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“The question now is whether this type of ‘Fed-friendly data’ will continue to provide upward momentum for the stock market,” he noted.

Chris Gaffney, head of global markets at EverBank, said the market is still vulnerable to some volatility going forward and is certainly data dependent.

“There is a back and forth with the markets and the Fed, and that will lead to more volatility as we go forward — through the end of the year and actually into next year,” he added.

Cleveland Fed President Loretta Mester said that although inflation has eased, it will take time for it to fully return to the central bank’s 2% target. Meester, who will not vote on policy decisions this year, said there are many uncertainties surrounding the economic outlook.

Meanwhile, former Treasury Secretary Lawrence Summers said “temporary factors” were one element of US inflation slowing faster than he expected.

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An uncertain economic outlook and attractive returns on cash have kept investors away from stocks this year despite their challenging run. Goldman Sachs Group Inc. believes… That caution will continue until 2024.

“We expect positive equity returns, but a 5% risk-free cash yield remains a competitive alternative,” said David Kostin, the bank’s chief US equity strategist. “In the current interest rate environment, the 3-month Treasury yield is 5.5%, which is similar to the dividend yield on the S&P 500.”

Global stocks will outperform bonds in 2024 as they go through a “soft” economic downturn, Barclays strategists said, becoming the latest to sound an optimistic tone on the asset class.

The team led by Ajay Rajadhyaksha has shifted the overweight on global equities to core fixed income, and said they expect “mid- to high-single-digit returns” in both the US and Europe next year. These expectations hold even as bond yields remain high and the S&P 500 earnings outlook “looks too optimistic to us,” they wrote.

The most prominent features of the company:

• Cybersecurity firm Palo Alto Networks Inc. has failed. Wall Street raised its billing estimates for the fiscal first quarter and lowered its estimates for the full year.

• Glencore Plc is poised to unleash a new coal giant on the New York market that – based on recent performance – could generate more profits than the 10 largest coal miners currently listed in the US combined.

• Blackstone raised $8 billion from institutional investors in the first close of a new direct-lending fundraising operation, people familiar with the matter said.

• Thousands of Starbucks baristas plan to strike on Thursday, claiming the coffee chain refuses to negotiate fairly with their union.

• Airbus found itself in unfamiliar territory at this year’s Dubai Airshow, receiving only a few dozen orders while Boeing placed its largest volume of orders in a decade.

• Alibaba Group Holding Ltd has canceled a spin-off of its giant cloud business after the United States tightened restrictions on China’s advanced chips, stunning investors and casting doubt on a landmark reform announced just months ago.

• Ant Group’s quarterly profit fell 65%, hurt by a one-time fine that signaled the end of China’s years-long crackdown on the technology industry.

Main events this week:

• Housing starts in the US on Friday

• The US Congress faces a midnight deadline to pass the federal spending measure on Friday

• European Central Bank President Christine Lagarde speaks on Friday

• Chicago Fed President Austin Goolsbee, Boston Fed President Susan Collins and San Francisco Fed President Mary Daly speak Friday.

Some key movements in the markets:

Stores

• The S&P 500 was down 0.2% as of 11:01 a.m. New York time

• The Nasdaq 100 index fell 0.3%.

• The Dow Jones Industrial Average fell 0.3%

• The Stoxx Europe 600 index fell by 0.6%.

• MSCI World Index fell 0.2%

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%.

• The euro rose 0.3 percent to $1.0877

• The British pound rose 0.2 percent to $1.2442

• The Japanese yen rose 0.6 percent to 150.39 yen to the dollar

Digital currencies

• Bitcoin fell 3.1% to $36,474.5

• Ethereum fell 2.4% to $1,998.51

Bonds

• The yield on the 10-year Treasury note fell nine basis points to 4.44%.

• The yield on 10-year German bonds fell by 8 basis points to 2.57%.

• The yield on British 10-year bonds fell by 12 basis points to 4.11%.

Goods

• West Texas Intermediate crude fell 4.1% to $73.53 a barrel

• Gold rose in spot transactions by 1.3% to $1,984.38 per ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Vildana Hajric.

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