Federal Reserve Chairman Jerome Powell’s reassuring message after the central bank’s monetary policy meeting may not calm U.S. investors in stocks and bonds amid uncertainty over the trajectory of the inflation intensifies attention to upcoming data.
Although Powell on Wednesday acknowledged the lack of recent progress in federal officials’ fight against rising consumer prices, he reiterated that interest rates are expected to fall this year.
That’s a relief to those who feared the Fed would consider further rate hikes after three straight months of higher-than-expected inflation.
Still, some investors think the market will be less inclined to take Powell at his word this time around, after a much-anticipated dovish pivot in December followed by several months of upside surprises on inflation and employment. A new round of strong economic data could reignite fears of rising rates and fuel further turmoil in stocks and bonds, they said.
Market swings Wednesday reflected investor nervousness: The S&P 500 closed down 0.3% after rising more than 1% during Mr. Powell’s news conference. Yields on 10-year Treasury bonds, which move inversely to prices, fell nearly 10 basis points.
If the Fed is as data-dependent as it claims to be, every data point will be scrutinized by the market to see if it signifies a hike for longer or the possibility that rate hikes are back on the table , said Steve Hooker, a portfolio manager at Newfleet Asset Management.
The first key data point arrives on Friday, with the closely watched US jobs report. New evidence of a stronger-than-expected labor market could continue to erode expectations for the extent of the Fed’s rate cut this year. Investors now expect cuts of 35 basis points in 2024, up from more than 150 basis points in January.
Data on everything from inflation to retail sales will be released later this month.
Although stocks are not far from record highs reached earlier this year, their rally has faltered as expectations for rate cuts have dwindled in recent weeks, leading the S&P 500 to record last month its worst performance since September.
Bond investors have been struggling for months, with the 10-year Treasury yield rising 70 basis points since the start of the year.
Market expectations have shifted from one extreme to the other, said Paul Mielczarski, head of global macro strategy at Brandywine Global. He’s overweight five- and seven-year Treasuries relative to his firm’s benchmark because he expects the Fed will eventually cut rates more than the market expects.
Naturally, the market is a little cautious…and waiting for the data to confirm the Fed’s underlying view that inflation can fall to 2% without the need for a recession, he said. declared.
Some investors worry that time is running out for the Fed to cut rates, despite it being relatively early in the year. Blerina Uruci, chief U.S. economist at T Rowe Price, thinks the Fed will need at least three months of weaker-than-expected data to be confident enough to cut rates.
If we don’t see the weakness in private sector rental prices reflected in the (consumer price) data, to what extent should we believe the deflationary impulse will continue? said Ms. Uruci. I don’t think this reversal in the inflation trend will happen quickly enough, Mr. Uruci said.
Others worry that high rates will soon begin to weigh on some U.S. businesses. Jonathan Duensing, head of U.S. fixed income at Amundi US, favors investment-grade corporate debt, in part because he thinks a prolonged period of high interest rates could create corporate stress less well rated.
He also was bullish on Treasuries, which would likely benefit from a flight to quality if the economy slows in the future, he said.
That doesn’t mean investors have completely given up hope of a rate cut. Tony Welch, chief investment officer at SignatureFD, believes much of the recovery in inflation earlier this year was due to commodity prices, which soared in part on concerns about worsening conflict in the Middle East.
Oil prices fell to a seven-week low on Wednesday, following a surprise increase in U.S. crude inventories and the prospect of a truce between Israel and the Gaza Strip.
Welch is optimistic about small caps, which he believes will benefit from easing interest rates as long as the economic outlook remains favorable.
I’m pretty confident that (the Fed) is right and reading the inflation tea leaves correctly, he said. (Reporting by David Randall and Davide Barbuscia; Writing by Ira Iosebashvili)
