Bonds fall due to a wait-and-see mode supported by the Fed: markets wrap

(Bloomberg) — Wall Street is grappling with another mixed economic report that sent Treasuries lower, as traders bet the Federal Reserve will show patience before it decides to cut interest rates this year.

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Yields rose across the US curve as data showed personal spending topped estimates – even as the Fed's preferred measure of core inflation slowed to its lowest level in nearly three years. With policymakers declaring they would like to see signs of a sustained slowdown before cutting borrowing costs, the numbers reinforced bets that the March pivot remains largely out of reach at this stage.

That's not to say investors have abandoned their bets on a rate cut in the first quarter, but they continued to price in full on a move in May. Of course, this will all depend on the next several economic reports, with the effects of disruptions in shipping yet to be seen. As Jerome Powell and his colleagues meet next week, Wall Street will wait to hear how it all shakes out in the balance of risks.

“There remains expectations that the Fed will discuss 'when' – not 'if' – to begin an interest rate cutting cycle,” said Quincy Crosby of LPL Financial. “Unless next month’s set of inflation data conclusively confirms that the path to 2% is on the horizon, the Fed will likely wait until May or June to start easing interest rates.”

Two-year US bond yields rose six basis points to 4.35%. After struggling for direction, the S&P 500 rose. The gauge rose for the seventh straight session, hovering near 4,900. The tech-heavy Nasdaq 100 underperformed as disappointing forecasts from Intel Corp and KLA Corp weighed on chipmakers.

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“The Fed's job is basically done, and they have a good case for lowering interest rates and helping reduce risks in the labor market. Of course, the Fed may choose to be patient and wait for more evidence that inflation is at hand. But markets are seeing the evidence , and is preparing for cuts in the next few months. I'm interested to see how the latest PCE data will impact Jay Powell's language on the balance of risks after next week's meeting.

“The big picture is that the Fed does not need to worry that stronger economic growth will stoke inflation, because it has not. We expect rate cuts in 2024, starting in May, and we are likely looking at four cuts of 25 basis points.

“The improving inflation trajectory is improving, giving the Fed room to cut interest rates this year. However, the Fed still has more work to do, and it should not give in to the temptation to declare ‘mission accomplished.’ It should not Investors are surprised to see a temporary spike in commodity inflation next month due to disruptions in shipping.

“A soft landing appears increasingly evident. The big question now is how quickly Jerome Powell will normalize policy when there is no immediate need. Data is less important going forward and internal conversations at the Fed are more important.”

“The FOMC does not need an inflation rate of 2% on an annual basis to lower interest rates, but will be cautious given the possibility that a tight labor market and strong consumer growth will reignite inflationary pressures in the US economy.”

“Given how much inflation has slowed over the past few months, a rate cut based on the Fed's next decision on March 20 is not out of the question. But the Fed will likely wait until the second quarter to start cutting interest rates.

“After a few weeks of hotter-than-expected economic data and inflation readings, the Fed's preferred inflation gauge kept the low inflation story on track. While the news may provide some juice for stock market bulls, the Fed is likely to hold With his position on lowering interest rates until the second half of the year.

“Today's reports are mainly neutral on Treasury yields and the dollar as inflation data was favorable, but real spending growth was strong.”

“We do not expect December data to materially change March cut prospects before the weekend, instead we will look to next week's supply announcements, FOMC decision and payroll printing to quickly capture market focus as the personal consumption expenditures reading is digested.”

“We view today's PCE and personal spending data as bullish for the Fed's path toward its 2% target as well as for the stock market. Based on the strong GDP and recent jobs data, we expect the first rate cut to be in the May-June period If jobs and/or economic data decline slightly and inflation continues to decline rapidly, this may increase the chances of a rate cut in March, but this is not our base case yet.

Elsewhere, bitcoin rose above $41,000 amid a slowdown in outflows from the $20 billion Grayscale Bitcoin Trust, which strategists said could help halt the currency's two-week decline. Oil is on track for its biggest weekly gain since October, as falling US inventories and the prospect of more government stimulus in China helped push crude oil out of a range it has been stuck in for months.

The most prominent features of the company:

• Spirit Airlines Inc. declined. After JetBlue Airways Corp. said… Its planned $3.8 billion acquisition of the low-cost carrier could be finalized in the coming days.

• American Express said it was committed to its long-term earnings and revenue goals and forecast 2024 earnings that beat analysts' estimates.

• Visa Inc. registered Profits beat Wall Street expectations as credit card spending rose amid strong economic growth in the United States.

• Salesforce Inc. It will lay off about 700 workers, adding to a brutal series of layoffs in the technology industry at the beginning of 2024.

• T-Mobile US Inc. announced It reported profits that exceeded analysts' estimates, which overshadowed the surprisingly strong increase in the number of new mobile phone subscribers.

• Saudi Aramco, the world's largest oil company, continues to send tankers loaded with crude oil and fuel through the southern Red Sea, where Houthi militants have for months been threatening commercial ships in retaliation for Israel's war in Gaza.

Some key movements in the markets:

Stores

• The S&P 500 was up 0.2% as of 10:52 a.m. New York time

• The Nasdaq 100 index fell 0.1%.

• The Dow Jones Industrial Average rose 0.4%

• The Stoxx Europe 600 index rose 1.1%.

• MSCI World Index rose 0.3%

Currencies

• The Bloomberg Dollar Spot Index fell 0.1%.

• The euro rose 0.1 percent to $1.0861

• The British pound rose 0.1 percent to $1.2721

• The Japanese yen fell 0.3 percent to 148.10 yen to the dollar

Digital currencies

• Bitcoin rose 3.4% to $41,271.13

• Ethereum rose 1.7% to $2,256.55

Bonds

• The yield on 10-year Treasury bonds rose by three basis points to 4.15%.

• The yield on 10-year German bonds rose two basis points to 2.31%.

• There was little change in the yield on British bonds for 10 years at 3.98%.

Goods

• West Texas Intermediate crude fell 0.1% to $77.25 a barrel

• Gold in spot transactions fell 0.2 percent to $2,017.35 per ounce

This story was produced with assistance from Bloomberg Automation.

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