(Bloomberg) – U.S. Treasuries fell as Wall Street grappled with mixed economic data, with traders betting the U.S. Federal Reserve would show patience before deciding to cut interest rates later this year.
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Bond losses were driven by shorter maturities, as data showed consumer spending exceeded expectations even as the Fed’s recommended measure of underlying inflation slowed to its lowest level in nearly three years. . Policymakers have signaled they want to see signs of a sustainable economic downturn before cutting borrowing costs, but the numbers only reinforced the view that a turnaround in March remains very difficult.
Investors have not given up their bets on a rate cut in the first quarter, but they remain fully priced in for the Fed’s move in May. Of course, it all depends on the next few economic reports, and the impact of shipping disruptions is not yet clear. Traders will be waiting to hear how all this plays out in the balance of risk as Jerome Powell and his colleagues meet next week.
“There remains an expectation that the Fed will be discussing ‘when’, not ‘if’, to begin a rate cutting cycle,” said Quincy Crosby, chief global strategist at LPL Financial. “The Fed is likely to wait until May or June to begin cutting rates unless next month’s collection of inflation-related data conclusively highlights a clear path toward 2%.”
The yield on the US two-year bond exceeded 4.35%. The S&P 500 was shaky, but posted its third consecutive week of gains. Disappointing forecasts from Intel and KLA weighed on semiconductor makers, causing the Nasdaq 100 to underperform. Crude oil prices hit a two-month high after a fuel tanker was commissioned by trading giant Trafigura Group. A missile attack while transiting the Red Sea highlighted geopolitical risks to oil supplies.
Mohamed El-Erian says it’s too early for U.S. policymakers to declare victory as the economy moves from the inflation sweet spot to a more difficult environment ahead.
El-Erian, president of Queen’s College at the University of Cambridge, told Bloomberg TV on Friday that the world’s largest economy’s third and fourth quarter results were “remarkable.” But “the big risk for the administration is that the economy will slow this year because some of last year’s growth engines are no longer present.” And second, inflation will stop falling. ”
“U.S. economic data continues to provide a positive backdrop for the market, with solid growth, moderate inflation and prospects for interest rate cuts,” said Solita Marcelli of UBS Global Wealth Management. “We expect the Fed to be comfortable cutting rates starting in May, but that will require further signs that the economy is cooling between now and then,” she said.
The Federal Open Market Committee is widely expected to keep interest rates unchanged for the fourth time in a row when it gathers in Washington on January 30th and 31st, but the real focus will be on what happens after its March meeting. .
The Fed is likely to oppose any imminent interest rate cuts, said Carl Riccadonna of BNP Paribas. Although a March policy decision cannot be ruled out if the data holds, he said the base case is for a 150 basis point rate cut to begin this year starting in May.
“I acknowledge that this is a close call, but there may be a slight hawkish bias in the statement,” he said. “If not, we hope that the committee will introduce language that signals a patient approach before adjusting policy settings.” The FOMC has been given time to determine whether it has converged on its 2% target.
Indeed, Mr. Powell and his colleagues have no intention of cutting interest rates to counter economic contraction, as they have often done in the past, so they can certainly take their time before starting to ease policy. . Rather, it will adjust policy to reflect the surprisingly sharp decline in inflation from multi-decade highs a year and a half ago.
“A soft landing seems increasingly obvious,” said TradeStation’s David Russell. “The big question now is how quickly Jerome Powell will normalize policy when there is no pressing need. Going forward, data will be less important and conversations within the Fed will be more important. ”
PNC’s Gus Faucher said the Fed doesn’t need inflation to reach 2% year over year in order to cut interest rates, but a tight labor market and strong consumer growth could reignite inflationary pressures. It would be prudent to consider this. LPL Financial’s Jeffrey Roach said the Fed has more work to do and should not be tempted to declare “mission accomplished.”
“With inflation nearly stalled, the question for the Fed is how to maintain inflation, and in particular how far to cut interest rates in 2024 to achieve a more neutral setting,” said Evercore ISI’s Krishna Guha. “It’s moving to,” he said. “Growth remains strong for now, raising questions about whether near-term neutral rates could be higher than most expect. I support it.”
Apart from next week’s FOMC meeting, traders will be keeping an eye on the latest labor market data. U.S. payrolls are expected to increase by about 180,000 in January, following an increase of 216,000 in December, according to a Bloomberg survey of economists.
And when the Treasury Department previews bond and debt auction sizes for the next three months on January 31, some of the expected sizes could be the largest investors have ever seen. is high. Bond yields have fallen sharply since October on expectations that the Federal Reserve, which has raised interest rates 11 times in the past two years to stem soaring inflation, will start cutting rates this year.
Businesses and governments took on $721 billion in new debt on international markets this month, a record amount, and investors eager to take on credit risks while yields are still plentiful. I found out something. Investors are insatiable in the primary market, piling up high-yielding bonds before central banks cut interest rates.
Next week, some of the mega-cap stocks that have driven the recovery in U.S. stocks since their October 2022 lows, including Apple, Microsoft, and Google’s parent company Alphabet, are also expected to release results.
Enthusiasm about artificial intelligence and growing optimism about the economy are contributing to the rally, but the ongoing fourth-quarter earnings season will be a key factor in determining the course of stocks this year. Expert opinion has been divided, especially recently, with some seeing the wild rally as a sign that the market is overheating, and others hoping for further gains in the future.
“This week’s impressive technical rally was further reinforced by encouraging macro data,” said Nationwide’s Mark Hackett. “Goldilocks economic indicators (strong growth, easing inflation) have eased investor concerns heading into next week’s FOMC meeting. Economic and market data are great, but mixed earnings season results provide headwinds That could be the case, but we’ll know more after next week’s flurry of announcements.”
Company highlights:
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JetBlue Airways warns its $3.8 billion takeover of Spirit Airlines could be scrapped within days, potentially leading to a clash between the two airlines over the thorny deal. did.
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Airbus SE is concentrating on a once-in-a-lifetime chance to win big orders from struggling rival Boeing Co. by persuading customers to return some aircraft slots and hand them over to United Airlines Holdings Inc.
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American Express said its 2024 profit forecast exceeded analyst expectations and remained committed to its long-term profit and revenue goals.
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Salesforce will cut about 700 employees, accelerating a brutal cycle of technology layoffs in early 2024.
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Johnson Controls International is considering selling a portfolio of heating and ventilation assets worth up to $5 billion, according to people familiar with the matter.
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Saudi Aramco, the world’s largest oil company, continues to send tankers laden with crude oil and fuel through the southern Red Sea, where Houthi militants have threatened commercial ships for months in response to Israel’s war in Gaza. ing.
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Grifols SA is suing Gotham City Research over a report that claims the company inflated profits and misrepresented accounting.
The main movements in the market are:
stock
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The S&P 500 was little changed as of 4 p.m. New York time.
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Nasdaq 100 falls 0.5%
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The Dow Jones Industrial Average rose 0.2%.
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MSCI World Index little changed
currency
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Bloomberg Dollar Spot Index little changed
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The euro was almost unchanged at $1.0855.
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The British pound was almost unchanged at $1.2702.
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The Japanese yen fell 0.3% to 148.06 yen to the dollar.
cryptocurrency
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Bitcoin rose 5.1% to $41,934.87
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Ether rose 1.8% to $2,256.9
bond
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The 10-year Treasury yield rose 2 basis points to 4.14%.
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German 10-year bond yield remains unchanged at 2.30%
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UK 10-year bond yields fell 2 basis points to 3.96%.
merchandise
This article was produced in partnership with Bloomberg Automation.
–With assistance from Michael Mackenzie and Liz Capo McCormick.
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