Just one day after the greatest winning run for the S&P 500 and Nasdaq in two years was snapped, stocks surged on Friday to secure yet another week of gains. This was prompted by a spike in bond rates and a more hawkish tone from Federal Reserve Chair Jerome Powell.
The benchmark S&P 500 (^GSPC) increased by around 1.6%, while the tech-heavy Nasdaq Composite (^IXIC) gained more than 2%, marking its highest day since May 26. The Dow Jones Industrial Average (^DJI) increased by 400 points, or 1.1%. We are currently seeing the greatest levels of the Dow, S&P 500, and Nasdaq since mid-September.
The US consumer is less optimistic about the US economy, according to new economic data released on Friday, and expectations for long-term inflation are rising to levels not seen since 2011. Despite this, Friday’s gains nevertheless occurred.
Bond yields increased Thursday afternoon but then gradually decreased. As it traded close to 4.63%, the benchmark 10-year yield (^TNX) decreased.
Amid worries about worldwide demand, oil fell to a three-month low and then increased for the second session in a row. While Brent crude futures (BZ=F) finished above $81.50 a barrel, West Texas Intermediate crude (CL=F) increased above $77 a barrel.
Investors will be analysing the Consumer Price Index (CPI) for October, one of the key data points the Federal Reserve will take into account when making its next interest rate decision, on Tuesday.
According to forecasts from Bloomberg, the report is anticipated to reveal headline inflation of 3.3%, which would be a slowdown from September’s 3.7% annual price growth. October consumer prices are predicted to have increased by 0.1% over the previous month, which is less than September’s 0.4% monthly gain.
According to Bloomberg statistics, prices are predicted to have increased 4.1% in October compared to September on a “core” basis, which eliminates the more erratic expenses of groceries and petrol.
A strong showing in the core is expected to overshadow October’s headline CPI’s muted gain, according to a note from Wells Fargo released ahead of the data.
The bank stated that while housing disinflation probably began in October, the constant drag from health insurance is expected to turn to a boost with this month’s release. Core CPI is anticipated to reflect “slower progress on inflation,” the bank added. Deflation of goods has most likely stopped.
The team at Wells Fargo anticipates that by this time next year, the core CPI would still be increasing by around 3% annually, adding that “slower inflation in the months to come does not necessarily mean victory on inflation.”
“Despite a robust equity rally, it’s remarkable that we are seeing minimal flows,” stated Scott Chronert, managing director of Citi, in a Friday post. “It really did nothing to entice a lot of stubborn asset allocator money off the sidelines.”
Due to market anxiety caused by a rise in bond rates and a more hawkish statement from Federal Reserve Chair Jerome Powell, the S&P 500 and Nasdaq both ended their longest winning streaks in two years on Thursday. On Friday, the indices recovered, with the S&P rising more than 1% in noon trading and the Nasdaq gaining over 2%.
Given that money markets continue to provide strong returns, cross-asset values probably have a role in this. With cash yielding more than 5%, investors could need to believe that all the conditions are met to purchase stocks, which might include a paused Fed, stable to lower long-term rates, sustained earnings resilience, and encouraging macroeconomic data, he concluded.
For the week ending Nov. 1, equity mutual funds and ETFs saw withdrawals totaling $8.4 billion, continuing a seven-week run of withdrawals, according to Citi.
Global equities products experienced net withdrawals of $3.4 billion over the week, while domestic funds witnessed outflows of $4.9 billion.
Despite declining petrol prices, Oxford Economics cautioned in a recent report that the rise in consumer inflation expectations “will be concerning to the Fed.”
Following the release of the data, Grace Zwemmer, an economic research analyst, commented, “The Fed will want to see a decline as they try to bring inflation down to their target rate of 2% and elevated inflation expectations would be another sign that rates will need to stay higher for longer.”
The Chair of the Federal Reserve, Jay Powell, stated on Thursday that the country’s monetary policy is now in “restrictive territory” and that more rate increases are still possible.
Powell stated, “If it becomes appropriate to tighten policy further, we will not hesitate to do so,” during a speech in Washington before the International Monetary Fund.