‘Fed-Friendly’ Data Lift Bonds as Stocks Struggle: Markets Wrap

(Bloomberg) — Treasuries climbed after data underscored a gradual economic slowdown, reinforcing speculation the Federal Reserve will end its most-aggressive hiking campaign in decades.

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Two-year yields headed toward their lowest since August, down nine basis points to around 4.8%. Following a torrid rally that sent the S&P 500 near “overbought” levels, the index struggled. As the earnings season draws to a close, traders remained focused on big-box retailers. Walmart Inc. slumped amid a cautious tone on the outlook for consumers, while Macy’s Inc. climbed on a profit beat. Cisco Systems Inc. sank after a bearish forecast. Oil extended declines amid swelling inventories.

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Continuing applications for US unemployment benefits rose to the highest level in almost two years, underscoring the increasing challenges unemployed workers are facing in finding new jobs. Factory production fell by more than expected, largely reflecting a strike-related pullback in activity at automakers and parts suppliers. Homebuilder sentiment fell to the lowest level this year.

“The lags in monetary policy are catching up with the economy now — from input costs to industrial production to labor,” said Jamie Cox, managing partner for Harris Financial Group. “Now, the fight shifts from inflation to preserving economic growth and averting recession. Rate cuts are closer than people think — perhaps even as early as March 2024.”

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While it’s still too early for the Fed to declare victory on inflation — and rate cuts are still far off — figures like the recent ones will tamp down lingering concerns about an additional hike, according to Chris Larkin at E*Trade from Morgan Stanley.

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

The market is still subject to some volatility going forward and is certainly data-dependent, said Chris Gaffney, president of world markets at EverBank.

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

Fed Bank of Cleveland President Loretta Mester said that while inflation has cooled, it’ll take time for it to fully return to the central bank’s 2% target. Mester, who doesn’t vote on policy decisions this year, said that there are many uncertainties to the economic outlook.

Meantime, Former Treasury Secretary Lawrence Summers said that “transitory factors” have been one element in a faster slowdown in US inflation than he anticipated.

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A murky economic outlook and alluring returns on cash kept investors out of stocks this year despite their defiant run. Goldman Sachs Group Inc. thinks the wariness will persist into 2024.

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

Global stocks will outperform bonds in 2024 as they navigate a “soft-ish” economic landing, Barclays Plc strategists said, becoming the latest to strike an optimistic tone on the asset class.

The team led by Ajay Rajadhyaksha turned overweight on global equities over core fixed income and said they expect “mid- to high single-digit returns” in both the US and Europe next year. That forecast stands even as bond yields stay elevated and earnings expectations for the S&P 500 “seem too optimistic to us,” they wrote.

Corporate Highlights:

• Cybersecurity firm Palo Alto Networks Inc. missed Wall Street estimates for billings in its fiscal first quarter and lowering its estimates for the full year.

• Glencore Plc is preparing to unleash a new coal supermajor on the New York market that would – based on recent performance – churn out bigger profits than the current top 10 US listed coal miners combined.

• Blackstone Inc. has raised $8 billion from institutional investors in the first close of a fresh direct lending fundraise, people with knowledge of the matter said.

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

• Airbus SE found itself in unfamiliar territory at this year’s Dubai Air Show, picking up only a few dozen orders while Boeing Co. charged ahead with the biggest haul in a decade.

• Alibaba Group Holding Ltd. has called off a spinoff of its giant cloud business after the US tightened curbs on advanced chips for China, stunning investors and casting in doubt a historic overhaul announced mere months ago.

• Ant Group Co.’s quarterly profit fell by 65%, dented by a one-time fine that signaled the end of China’s yearslong crackdown on the tech industry.

Key events this week:

• US housing starts, Friday

• US Congress faces a midnight deadline to pass a federal spending measure, Friday

• ECB President Christine Lagarde speaks, Friday

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

Some of the main moves in markets:

Stocks

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

• The Nasdaq 100 fell 0.3%

• The Dow Jones Industrial Average fell 0.3%

• The Stoxx Europe 600 fell 0.6%

• The MSCI World index fell 0.2%

Currencies

• The Bloomberg Dollar Spot Index fell 0.2%

• The euro rose 0.3% to $1.0877

• The British pound rose 0.2% to $1.2442

• The Japanese yen rose 0.6% to 150.39 per dollar

Cryptocurrencies

• Bitcoin fell 3.1% to $36,474.5

• Ether fell 2.4% to $1,998.51

Bonds

• The yield on 10-year Treasuries declined nine basis points to 4.44%

• Germany’s 10-year yield declined eight basis points to 2.57%

• Britain’s 10-year yield declined 12 basis points to 4.11%

Commodities

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

• Spot gold rose 1.3% to $1,984.38 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Vildana Hajric.

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