(Bloomberg) — The world’s largest bond market started the week off as geopolitical pressures eased and traders positioned themselves for this week’s key inflation data.
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Yields on the 10-year Treasury rose to their highest level since November and moved closer to the 4.5% level that some investors see as a threshold that could determine whether rates return to 2023 highs. Traders’ conviction Concern about a three-quarter point rate cut by the Federal Reserve this year is dissipating quickly, with markets now favoring just two cuts.
Economists surveyed by Bloomberg expect Wednesday’s consumer price index to show some easing of inflationary pressures. Still, the core indicator, which excludes food and energy costs, would be up 3.7% from a year earlier, above the Fed’s 2% target. .
“After Monday’s solar eclipse, underlying U.S. inflation will determine whether the shadow that markets are increasingly pricing in over a June rate cut will widen or pass,” the analysts said. Morgan Stanley strategists, including Matthew Hornbach.
Benchmark 10-year yields rose two basis points to 4.42% – after hitting 4.46% earlier on Monday. The S&P 500 hovered near 5,200. Megacaps were mixed, with Nvidia Corp. down and Tesla Inc. up almost 5%. Oil fell as Israel announced it would withdraw some troops from Gaza. Bitcoin surpassed $71,000.
Read: Bearish Treasury Options Trades Target 10-Year Yield Above 5%
Read: Fed’s Goolsbee says unemployment will rise if rates stay too high
As some Fed members weigh whether to cut rates if inflation remains in a “persistent” holding pattern, this week’s inflation numbers could have a lot of influence on them, according to Chris Larkin at Morgan Stanley’s E*Trade.
“While the Fed was hesitant to read too much into consecutive months of higher-than-expected inflation data, a third month could cause it to change its tune,” he noted.
JPMorgan Chase & Co. economists led by Michael Feroli pushed back their forecasts for the first Fed rate cut of the cycle after a strong jobs report in March. They now expect the US central bank to start easing monetary policy in July instead of June.
“While investors appear to be eagerly awaiting an easing of monetary policy, the current environment doesn’t really scream ‘rate cuts!’ » said Jason Pride of Glenmede. “With a strong job market, an expanding manufacturing industry, and rising commodity prices, the Fed will likely be in no rush to cut rates.”
The swap contracts imply about 60 basis points of monetary easing in the United States this year, meaning two cuts are the most likely outcome, with the first expected by September, according to Bloomberg pricing. On Friday, the chances of a third reduction were still above 50%.
A rise in bond yields could be driven by “the wrong reasons” and would put stocks under pressure, according to JPMorgan strategists led by Mislav Matejka.
The team expects US 10-year yields to fall amid elevated geopolitical risks, while noting the risk that inflation remains too high. Given the risk of inflation overshooting, stocks with high financing costs could remain under pressure, the strategists wrote.
According to Deutsche Bank AG strategists led by Parag Thatte and Binky Chadha, the stock market rally is likely to stall as earnings season approaches as buybacks decline during blackout periods and stock inflows stagnate due to seasonality.
Wall Street expects a moderate earnings season from American companies despite the stock market fireworks of the first quarter.
Strategists predict that S&P 500 companies will post their weakest year-over-year profit growth since 2019, just 3.9%, in the first quarter, according to data compiled by Bloomberg Intelligence. But in this case, the market may be right, because these forecasts could very well turn out to be too gloomy, as they were in the fourth quarter, when expectations were around 1% growth and actual results were were found to be greater than 8%. %.
“Recent inflation resilience reduces the immediacy of rate cuts, putting more pressure on earnings to drive future market gains,” said Richard Saperstein of Treasury Partners. “Given high stock multiples and rising bond yields, we remain cautious on stocks until earnings season provides clear evidence of earnings growth.”
Wells Fargo Securities’ Christopher Harvey just placed Wall Street’s highest target on the S&P 500 for 2024, based on his expectations that the rally in U.S. stocks will continue throughout the year.
Harvey raised his year-end forecast on the benchmark index to 5,535 from 4,625 previously, making him the biggest bull among strategists tracked by Bloomberg. The growth potential of artificial intelligence technology and improving earnings prospects are among the upside catalysts he sees, along with longer time horizons and higher valuation thresholds from investors , Harvey told clients in a note Monday.
Company strengths:
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Tesla Inc. plans to unveil its long-promised robotaxi later this year as the automaker struggles with weak sales and competition from cheap Chinese electric vehicles.
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99 Cents Only Stores LLC filed for bankruptcy after announcing plans in April to end its business operations.
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Shares of apartment owners saw a rally after Blackstone Inc., the world’s largest owner of commercial real estate, stepped up its bet on the sector.
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United Airlines Holdings Inc. is delaying two new routes due to imposed growth restrictions while U.S. aviation authorities conduct a safety review of the carrier.
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Spirit Airlines Inc. announced a sweeping cost-cutting program, less than three months after its proposed merger with JetBlue Airways Corp. collapsed. due to antitrust concerns.
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The United States plans to give Taiwan Semiconductor Manufacturing Co. $6.6 billion in grants and up to $5 billion in loans to help the world’s top chipmaker build factories in Arizona, expanding the President Joe Biden’s efforts to boost domestic production of critical technologies.
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Alibaba Group Holding Ltd. is slashing prices for its U.S. cloud customers in Singapore by up to 59%, reflecting deep reductions in the country, as the once-high-flying division struggles to fend off rivals and revive growth.
Key events this week:
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China’s overall financing, money supply and new yuan loans, Tuesday
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Japan PPI, Wednesday
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Canadian rate decision Wednesday
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US CPI, Fed minutes, Wednesday
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Chicago Fed President Austan Goolsbee speaks Wednesday
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China PPI, CPI, Thursday
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Decision on ECB rates in the Eurozone, Thursday
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First unemployment claims in the United States, PPI, Thursday
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New York Fed President John Williams speaks Thursday
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Boston Fed President Susan Collins speaks Thursday
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Chinese trade, Friday
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Consumer sentiment from the American University of Michigan, Friday
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Citigroup, JPMorgan and Wells Fargo are due to report results on Friday.
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San Francisco Fed President Mary Daly speaks Friday
Some of the main market movements:
Actions
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The S&P 500 was little changed as of 4 p.m. New York time
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The Nasdaq 100 has changed little
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The Dow Jones Industrial Average was little changed
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The MSCI World index increased by 0.2%
Currencies
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The Bloomberg Dollar Spot Index fell 0.1%
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The euro rose 0.2% to $1.0857
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The British pound rose 0.1% to $1.2655
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The Japanese yen fell 0.1% to 151.84 per dollar
Cryptocurrencies
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Bitcoin rose 3.6% to $71,783.07
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Ether rose 8.9% to $3,705.8
Obligations
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The 10-year Treasury yield rose two basis points to 4.42%
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The German 10-year yield rose four basis points to 2.43%
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The UK 10-year yield rose two basis points to 4.09%
Raw materials
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West Texas Intermediate crude fell 0.4% to $86.53 a barrel
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Spot gold rose 0.4% to $2,338.53 an ounce
This story was produced with the help of Bloomberg Automation.
–With help from Isabelle Lee, Jessica Menton, Sagarika Jaisinghani, Carter Johnson, Alexandra Semenova and Stephen Kirkland.
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