U.S. Bond Yields Rose After Inflation Numbers Reduced Interest Rate Bets

Interest rate swaps fully anticipate the first cut in the borrowing yield in July

Meanwhile, retail sales were weaker than expected. While it may be too early to draw any conclusions, the latest set of data has raised some concerns about the specter of stagflation.

“Shocking” data

Chris Low of FHN Financial said: “Well, the data came as a shock… Following the second consecutive CPI beating expectations, and just one week before the Federal Reserve meeting, the producer price index for February rose.” At twice the expected pace, retail sales were at best very poor, if not completely weak.

US 10-year bond yields rose 10 basis points to 4.29%. Traders have reset their bets on Fed rate cuts in 2024, with swaps fully anticipating the first cut in July. The S&P 500 fell to about 5,150 points before options expiration on Friday, which could amplify volatility. The stock prices of Nvidia and Tesla fell, and the stock prices of homebuilding companies also fell after Lennar’s weak forecasts. The value of the dollar rose, and the price of oil reached $81.

Chris Larkin, of Morgan Stanley’s E*Trade, said: “In a way, today was a summary of last month’s numbers, entrenched inflation combined with signs of weakness elsewhere in the economy. The question now is: Will traders rethink when the Fed will cut interest rates and will that slow the stock market rally in any meaningful way?

Maintaining interest rates for the fifth time

“The inflation numbers give the Fed no incentive to ease monetary policy,” said Andrew Brenner of NatAlliance Securities.

The Federal Reserve is expected to keep interest rates unchanged at its March 19-20 meeting for the fifth time in a row. Following reports warning of continued high inflation rates, the focus will be on the Federal Reserve’s new “dot chart”. The average of monetary policymakers’ forecasts released in December showed interest rates being cut three times in 2024 by a quarter of a percentage point each.

Bullet chart

Over two days on Capitol Hill earlier this month, Powell offered no evidence that he was bothered by rising asset prices, which arguably worked against his goal of keeping financial conditions tight enough to cool the economy.

“Stock and bond bulls are watching their calendars and drawing a ‘big red circle’ on the 20th,” said Jose Torres of Interactive Brokers. “People are concerned that Chairman Jerome Powell may have to step back dangerously on his journey on the monetary policy highway. His dovish messaging since December has led to a severe easing in financial conditions,” he added.

As for Ian Lingen of BMO Capital Markets, he believes that the set of economic data that appeared on Thursday did not provide anything new for the Federal Reserve meeting expected next week. He noted that it was only a small amount of data and “insufficient” to draw any broad conclusion.

Ellen Zentner, of Morgan Stanley, expects little change in the Fed’s statement and forecasts, with the average forecast of monetary policy officials remaining at a rate cut of 3 times.

She noted, “The main risk: It will only take two members to change the average expectations of monetary policy officials from cutting interest rates three times to two times in 2024, which confirms that the risks tend towards a smaller number (of interest rate cuts) and not greater.. The president is unlikely to be “Powell is in the ‘twice-cut camp’ and we believe he will push to keep the average at three.”

With February CPI and PPI data available, Bloomberg Economics estimates that the deflator for core personal consumption expenditures – the Fed’s most closely followed inflation indicator – and basic services excluding housing, i.e. the “super core,” will moderate.

While February’s producer price index was stronger than expected, details affecting personal consumption expenditures inflation were on the “weaker side,” according to Bank of America economists, including Michael Gaben.

“We still expect the Fed to begin its rate-cutting cycle in June,” they said. “However, you will need to see further improvement in the upcoming inflation data to have enough confidence to start easing” monetary policy.

Bubble mentality

Amid all these economic and monetary policy uncertainties, stocks have also struggled to gain any momentum.

Meanwhile, the soaring valuations of a few giant companies have some market watchers worrying about a bubble.

Markets are showing the characteristics of a bubble with the “Big Seven” technology stocks hitting a record high and cryptocurrencies reaching all-time highs, according to Michael Hartnett of Bank of America.

With inflation accelerating again, growth weakening slightly and risky assets unaffected, “this is a clear indication of a bubble mentality,” Hartnett told Bloomberg TV.

While the top 10 stocks in the benchmark index are actually historically expensive compared to the rest of the market – the other 490 stocks are also trading at multiples well above their long-term averages, says Ed Clissold of Ned Davis Research.

If a bubble is forming in US stocks, it has plenty of room to expand before it bursts, according to Société Générale strategists.

A team at the bank led by Manish Kabra said that the S&P 500 could rise to 6,250 points, roughly 20% of its current level, before reaching the multiples seen at the height of the dot-com boom in 2000. This indicates The stock market could continue its sharp rise despite growing fears that it has gone too far.

Performance of the most important indicators:

• The S&P 500 was down 0.3% at 4pm New York time
• The Nasdaq 100 index fell by 0.3%.
• The Dow Jones Industrial Average fell 0.3%
• The Bloomberg Dollar Spot Index rose 0.3%.
• The price of Bitcoin fell 5.3% to $69,284.01
• The value of “Ether” fell 5.3% to $3,780.22
• The price of gold in spot transactions fell 0.5% to $2,163.19 per ounce