Stocks join bonds as Powell is in no rush to cut: Markets down

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By journalsofus.com


(Bloomberg) — The world’s largest bond market suffered a fresh blow, sending stocks falling and the dollar rising as Jerome Powell signaled policymakers are in no rush to cut interest rates.

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Speaking on Tuesday, the Federal Reserve chief said it will take longer to regain confidence on inflation, given the lack of recent progress. Powell also said it was appropriate to give the Fed’s restrictive policy more time to work. Treasury yields hit new highs through 2024 – hovering near the 5% mark on two-year notes. Stock markets are headed for their worst three-day decline since October.

For Jeffrey Roach at LPL Financial, Powell’s comments indicate the Fed will likely remain on hold longer than originally planned.

Andrew Brenner of NatAlliance Securities said, “Powell is speaking aggressively … rate cuts are being taken further out of the curve.” “He needs to see the data.”

The S&P 500 remained near 5,050. Bank of America Corp sank after beating estimates on bad loan charges, while Morgan Stanley climbed after traders reported solid revenue. UnitedHealth Group Inc. led the Dow Jones Industrial Average after its results.

Treasury 10-year yields rose six basis points to 4.67%. The greenback rose against all its developed-market counterparts.

Powell’s comments represent a change in his message after the third consecutive month in which a key measure of inflation has exceeded analyst forecasts. It also suggests that officials see little urgency for a rate cut and suggests that any cuts in 2024 may come relatively late in the year, if at all.

According to Mohamed El-Erian, policymakers around the world are struggling to cope with the rising greenback and higher US interest rates.

“Officials around the world are a little concerned about how you react to generalized dollar strength?” El-Erian, president of Queens College, Cambridge and a Bloomberg Opinion columnist, told Bloomberg Television on Tuesday. “What is your reaction to the generalized rise in interest rates in the US?”

Fed Vice Chairman Philip Jefferson said on Tuesday that although much progress has been made in reducing inflation, the Fed’s task of permanently restoring 2% inflation “is not yet complete.” Her San Francisco counterpart Mary Daly reiterated late Monday that there is no urgency to adjust interest rates, pointing to solid economic growth, a strong labor market and still-elevated inflation.

After starting the year with six rate cuts or an easing of 1.5 percentage points in 2024, traders are now skeptical that a cut of even half a point will happen. Most economists on Wall Street have also reversed forecasts, creating a gloomy outlook for US yields, with a possible resumption of maturities above 5%, as happened last October.

Amid all the concerns, the widely watched MOVE index, an options-based measure of expected volatility in Treasuries, rose to its highest level since January.

State Street Global Advisors is sticking to contradictory calls for the Fed to cut interest rates as soon as June, despite a string of warm economic data that has led most traders to place bets on the end of the year.

According to Chief Investment Officer Lori Haenel, asset managers are confident that the central bank will begin monetary easing long enough before the US presidential election in November to avoid influencing the outcome. He said the inflationary backdrop still supports the move, as policy actions have been taking place with longer intervals and the quality of the recent data print has been low.

According to top Wall Street strategists, exposure to stocks is now so high that any weakness is likely to lead to a big drawdown when investors start cutting their long positions.

There are $52 billion of long positions on the S&P 500 and 88% of them are in losses, Citigroup strategist Chris Montagu sees this situation as a risk to the market.

Investors have increased their allocation to equities to a net 34% overweight in January, a BofA survey of 224 participants with $638 billion of assets under management conducted April 5-11 showed. The biggest after 2022.

A separate note showed that BofA clients were net sellers of US equities for the third consecutive week.

Quantitative strategists led by Jill Carey Hall said in a note Tuesday that clients pulled a net $800 million out of U.S. stocks in the five-day period through April 12, as the S&P 500 index fell this week.

“Right now, the stock market is facing a correction due to concerns about Middle East tensions, rising bond yields and a Fed rate delay,” said James Demmert of Main Street Research. “The stock has been declining for a long time.”

BlackRock Inc.’s Robert Capito says the stock market is set to benefit as investors are parking large amounts of their cash.

There is about $9 trillion in money market funds and a similar amount in cash alternatives at banks, Kapito, chairman of the world’s largest asset manager, said at the Asia Pacific Financial and Innovation Symposium in Melbourne on Tuesday.

“Rising bond yields are a sign that the global economy and corporate profits are strong and resilient,” said Demmert at Main Street Research. “While this economic and corporate strength may result in less than expected or no rate cuts in the near future, it is not something that will doom this new bull market.”

“In the early stages of the new business cycle, it is earnings – not the Fed – that drives stocks. Earnings were better than expected and we are expecting similar results as the earnings season is once again in full swing,” he concluded.

Corporate Highlights:

  • PNC Financial Services Group Inc. Net interest income in the first quarter missed estimates, a sign that the Pittsburgh-based lender is grappling with sluggish loan growth.

  • Bank of New York Mellon Corp reported first-quarter revenue that topped estimates as the oldest U.S. lender benefited from higher market values ​​and increased customer activity.

  • UnitedHealth Group Inc. beat Wall Street’s profit expectations and affirmed its outlook for the year, despite costs related to a cyberattack on one of its subsidiaries that has roiled the health care industry.

  • Johnson & Johnson’s first-quarter drug sales fell well short of Wall Street expectations as the company beat profit estimates, a step toward boosting profitability following the spinoff of its consumer division.

  • LVMH’s sales growth slowed at the beginning of the year as wealthy consumers stopped spending on expensive Louis Vuitton handbags and Hennessy cognacs.

  • Adidas AG raised its profit target for the year amid strong demand for classic sneakers like the Samba and a boost in sales of dwindling stocks of Yeezy footwear.

Major events of this week:

  • Eurozone CPI, Wednesday

  • The Fed released its beige book on Wednesday

  • Cleveland Fed President Loretta Mester speaks on Wednesday

  • Fed Governor Michelle Bowman speaks Wednesday

  • BOE Governor Andrew Bailey speaks, Wednesday

  • Taiwan Semiconductor earnings, Thursday

  • US Conf. Billboard Leading Index, Existing Home Sales, Initial Jobless Claims, Thursday

  • Fed Governor Michelle Bowman speaking on Thursday

  • New York Fed President John Williams speaks on Thursday

  • Atlanta Fed President Raphael Bostic speaks on Thursday

  • BOE deputy governor Dave Ramsden and ECB Governing Council member Joachim Nagel speak on Friday

  • Chicago Fed President Austin Goolsbee speaks on Friday

Some key movements in the markets:

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  • The S&P 500 fell 0.2% as of 2:26 p.m. New York time

  • The Nasdaq 100 was little changed

  • Dow Jones Industrial Average rose 0.2%

  • MSCI world index fell 0.8%

currencies

  • Bloomberg dollar spot index rose 0.3%

  • The euro was little changed at $1.0619

  • The British pound fell 0.1% to $1.2431

  • The Japanese yen fell 0.3% to 154.69 per dollar

cryptocurrency

  • Bitcoin fell 0.7% to $62,721.56

  • Ether fell 0.7% to $3,060.44

bond

  • Yields on 10-year Treasuries rose six basis points to 4.67%

  • Germany’s 10-year yield rose five basis points to 2.49%

  • UK 10-year yield rose six basis points to 4.30%

Goods

  • West Texas Intermediate crude fell 0.2% to $85.21 a barrel

  • Spot gold rose 0.2% to $2,387.84 an ounce

This story was generated with the assistance of Bloomberg Automation.

– With assistance from Farah Elbahrawi, Sagarika Jaisinghani, Isha Dey, Natalia Kniazevich, Alexandra Semenova and Carter Johnson.

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