Better-than-expected statistics on US job vacancies and manufacturing goods orders fueled scepticism about the rate of Federal Reserve easing, reigniting the “good news is bad news” trade. With markets predicting fewer rate cuts in 2024 than the Fed, 10-year rates rose to their highest level since November. That dragged on the equity market, which had been disregarding the repricing of central-bank bets in recent months during a wild surge.
“Stock bulls may find it difficult justifying buying stocks at these elevated levels as yields rise,” said Fawad Razaqzada of City Index and Forex.com. “Rising crude oil prices provide an extra risk to the inflation forecast. Furthermore, several job reports are expected during the week. Trading may be turbulent.”
Following hotter-than-expected statistics in several parts of the world, the worldwide edition of Citigroup’s Economic Surprise Index — which analyses the gap between actual releases and analyst forecasts — is nearing its highest level in a year. Just this week, the two largest economies, the United States and China, reported good manufacturing data.
The S&P 500 saw its worst day in over a month. Tesla Inc. suffered the most losses among megacaps. A gauge of tiny caps fell roughly 2%. The VIX, Wall Street’s favourite volatility index, rose. US 10-year rates increased four basis points to 4.35%. Oil rose to $85, copper surged, while gold remained at record highs. Bitcoin plummeted.
As traders awaited Fed Chair Jerome Powell’s speech on Wednesday, they considered comments from two members who will vote on monetary policy decisions this year.
San Francisco Fed President Mary Daly and her Cleveland colleague Loretta Mester said they still anticipate the central bank to drop rates three times in 2024, but they aren’t in a hurry to start decreasing borrowing costs.
Swap traders are presently forecasting approximately 65 basis points of rate cuts this year, which is fewer than the 75 basis points signalled in the Fed’s most recent “dot plot” prediction.
“Our base case is that the Fed engineers a soft landing and starts to cut rates in the second half of the year,” said Gargi Chaudhuri of BlackRock. “The downside risks to economic growth have diminished, so the risk of only two Fed rate cuts now appears higher than the risk of four cuts.”
US markets have risen from their October lows, despite revised Fed reduction expectations. According to Mislav Matejka, strategist at JPMorgan Chase & Co., the mismatch between equities markets and rate forecasts is a cause for concern.
Investors who are selling equities because the Fed may reduce its intentions for interest rate decreases are missing the point. According to Andrew Slimmon of Morgan Stanley Investment Management, the decision would be a positive indication for the economy and, by extension, the equities markets.
“I think a patient Fed validates that the economy is strong,” Slimmon told Bloomberg Television. “That’s better for equities.”
According to statistics gathered by Bespoke Investment Group, the trailing one-year return of the S&P 500 has outperformed that of long-term US Treasuries for 40 months in a row, the longest stretch since 1978.
“Bonds have been due for a bounce, but if you’ve been holding your breath waiting for one, RIP,” the company stated in a statement.
Bespoke also noted that the equities measure was up more than 30% on a total return basis in the year ending March 31, the index’s best 12-month performance since October 2021.
“A correction can happen at any time, but the S&P 500’s median performance one, three, six, and 12 months after initially rallying 30% in a year was better than the average for all periods,” Bespoke said in a statement.
Furthermore, despite the equities decline this week, the market has avoided significant pullbacks at an unprecedented rate.
According to JPMorgan Asset Management statistics dating back to 1980, the greatest drawdown for the S&P 500 in 2024 is approximately 2%, putting it on track to be one of the lowest ever if this trend continues for the remainder of the year.
Furthermore, good first-quarter returns are often a positive indicator for US equities, with greater increases expected by the end of the year. According to Keith Lerner of Truist Advisory Services, the S&P 500 has increased by at least 10% in the first quarter 11 times since 1950. According to Truist statistics, the stocks index rose 10 out of 11 times over the rest of the year, with an average gain of 11%.