Yahoo Finance Treasuries Up Before PCE as Nike Hit in Late Hours: Markets Wrap
(Bloomberg) -- The world’s largest bond market rose after the latest batch of economic reports reinforced speculation the Federal Reserve will be able to cut interest rates this year to prevent a bigger US slowdown.
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Traders gearing up for the Fed’s favored inflation gauge piled into Treasuries as several data points illustrated a downshift in growth tied to the central bank’s higher-for-longer stance. The government marked down personal spending to an annualized 1.5% in the first quarter. Separate releases showed declines in orders and shipments of certain business equipment, weakness in the job market and a slide in homebuying.
To Chris Low at FHN Financial, the slowdown story got stronger.
“Continuing claims inched higher and are now the highest since late 2021 — sending a warning sign that the labor market could be softening,” said Jeff Roach at LPL Financial. “We expect both consumer and business activity to slow in the latter half of 2024, giving the Fed ample opportunity to begin cutting rates later this year.”
Treasury 10-year yields fell four basis points to 4.29%. The S&P 500 fluctuated around 5,480. In late trading, Nike Inc. sank as sales missed estimates. Walgreens Boots Alliance Inc. tumbled 22% in regular hours after slashing its guidance. Chewy Inc. and Petco Health and Wellness Co. whipsawed as Keith Gill — known as “Roaring Kitty” — posted a cartoon image of a dog on X.
Traders are pricing in roughly “one volatility point” of added premium Friday, the session after Joe Biden and Donald Trump’s debate, according to an analysis from Citigroup Inc. that compared current and expected volatility. That assumes the effect of options expiry at quarter-end, another potential catalyst that could swing stocks, will be similar to that for triple-witching last week.
US PREVIEW: May PCE Inflation to Offer Welcome News for Fed
Fed Bank of Atlanta President Raphael Bostic said he continues to expect one rate reduction this year amid signs inflation has resumed its decline. His projection echoes that of the Federal Open Market Committee. Earlier this month, Fed officials penciled in just one rate reduction for 2024, according to the median forecast.
Swap markets are pricing in about 45 basis points of easing in 2024, which would equate to less than two cuts.
Economists expect data Friday to show that the Fed’s preferred gauge of underlying inflation slowed to an annualized rate 2.6% last month from 2.8%. While that’s the lowest reading since March 2021, it remains above the Fed’s goal for 2% inflation.
“A consensus move would conform with the narrative that the early-2024 reflationary pressures are fading, and the cooling trend seen during the second half of 2023 has once again resumed in the second quarter,” said Ian Lyngen and Vail Hartman at BMO Capital Markets. “Perhaps more importantly, investors are anticipating a round of inflation data that offers incremental support for a September rate cut.”
A string of weaker-than-estimated data points has sent the US version of Citigroup’s Economic Surprise Index to the lowest since August 2022. The gauge measures the difference between actual releases and analyst expectations.
Worries about the strength of the labor market and the subsequent effect on consumer spending — in addition to the market’s reliance on just a handful of stocks — have caused consternation and warnings that the bull market needs a rest, recalibration and maybe help from the Fed, according to Quincy Krosby at LPL Financial.
Should Friday’s PCE data disappoint, stagflation headlines will hit the tape, Krosby noted. But if estimates hold or surprise with cooler data, it should help the market ease into July.
“Still, an overbought market and relatively expensive market based on just a handful of mega names may need to recalibrate and allow other sectors to co-exist with them or even begin to lead the market,” she said. “Such adjustments can trigger pockets of volatility coupled with attractive pockets of opportunity.”
Ed Clissold at Ned Davis Research says persistent pessimism toward the economy and stocks has been a key driver of the bull market. And much of the pessimism has given way to optimism or neutral views.
“The sentiment shift puts more of the onus on fundamentals for the bull market to continue,” he said. “Our conclusion is that the stock market can no longer rely on the economy beating low expectations. Fundamentals will need to drive the bull market in the second half.”
For now, Clissold remains bullish on stocks — both on an absolute basis and relative to bonds and cash.
To Chris Senyek at Wolfe Research, volatility will likely continue to pick up, and this will generally benefit the “Magnificent Seven” megacaps and the overall momentum trade in the weeks ahead.
“More specifically, we expect these themes to continue to benefit from environment in which growth is slowing — but the Fed is expected to kick off a deep cutting cycle,” he noted. “Further, our sense is that the biggest companies driving these trends will once again put up very solid results during the second-quarter earnings season.”
A survey conducted by 22V Research showed that investors largely expect artificial-intelligence companies to beat second-quarter earnings estimates.
About 59% of the investors surveyed think AI earnings will “beat” expectations and 36% believe they will “meet”. Only 5% think they will “miss” forecasts.
Despite thinking that these companies will beat, the investors surveyed are unsure about the the stock reaction for AI companies, 22V said.
In a month when Nvidia Corp. briefly became the world’s largest company amid AI optimism, hedge funds were “aggressively” selling tech stocks, according to analysis from Goldman Sachs Group Inc.
This month’s net selling in the US tech sector is on track to be the largest on record going back in data since 2017, according to Goldman’s prime brokerage data. The trimming of exposure by hedge funds is in sharp contrast to the record inflows seen into tech-related funds last week.
Corporate Highlights:
Boeing Co.’s move to switch its bid for Spirit AeroSystems Holdings Inc. to a mostly stock deal is likely an effort to preserve cash and stave off ratings downgrades as the planemaker teeters on the edge of junk, according to credit analysts.
Webtoon Entertainment Inc. shares climbed 9.5% in the online comics company’s debut after a US initial public offering that raised $315 million, priced at the upper end of a marketed range.
Denim maker Levi Strauss & Co. reported quarterly sales that fell just short of estimates, underscoring Wall Street’s high expectations for the company.
International Paper Co. plunged after Suzano SA said it would end its pursuit of the US paper giant.
Customers of major US telecommunications companies including AT&T Inc., T Mobile US Inc. and Verizon Communications Inc. are reporting issues connecting to their networks while outside of the country.
Target Corp. is lowering the bar to stop shoplifters, taking a tougher approach to further curb store theft that has weighed on operations.
L’Oreal SA expects slower growth for the overall beauty market this year, according to its CEO, as weakness in China weighs on sales after years of rapid gains.
Key events this week:
Japan Tokyo CPI, unemployment, industrial production, Friday
US PCE inflation, spending and income, University of Michigan consumer sentiment, Friday
Fed’s Thomas Barkin speaks, Friday
Some of the main moves in markets:
Stocks
The S&P 500 was little changed as of 4 p.m. New York time
The Nasdaq 100 rose 0.2%
The Dow Jones Industrial Average was little changed
The MSCI World Index was unchanged
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro rose 0.2% to $1.0703
The British pound rose 0.1% to $1.2639
The Japanese yen was unchanged at 160.81 per dollar
Cryptocurrencies
Bitcoin rose 0.7% to $61,385.55
Ether rose 1.7% to $3,446.92
Bonds
The yield on 10-year Treasuries declined four basis points to 4.29%
Germany’s 10-year yield was little changed at 2.45%
Britain’s 10-year yield was little changed at 4.13%
Commodities
West Texas Intermediate crude rose 1.2% to $81.89 a barrel
Spot gold rose 1.2% to $2,326.02 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Michael Msika, Carly Wanna, Richard Henderson, Divya Patil and Robert Brand.
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