(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 4.28%. A $44 billion sale of seven-year notes saw solid demand. Swap markets are pricing in about 45 basis points of easing in 2024, which would equate to less than two cuts.
The S&P 500 fluctuated around 5,470. Amazon.com Inc. rose, while Nvidia Corp. dropped. Micron Technology Inc.’s forecast failed to meet lofty expectations. Walgreens Boots Alliance Inc. tumbled 25% after slashing its guidance. Chewy Inc. and Petco Health and Wellness Co. jumped as Keith Gill — known as “Roaring Kitty” — posted a cartoon image of a dog on X.
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Fed Bank of Atlanta President Raphael Bostic said he continues to expect one rate reduction this year in the fourth quarter 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, down from the three projected in March, according to the median forecast.
“FOMC members have indicated they want to see more progress on inflation,” said Don Rissmiller at Strategas. “Fortunately, the US economy still looks robust enough currently to take an extended rate pause.”
Stuart Paul at Bloomberg Economics expects Friday’s core personal consumption expenditures price data to be the slowest yet this year — welcome news for Fed officials.
“But with bottoms-up analysis pointing to disinflation stalling in months ahead, it will take swifter cooling in the labor market for the Fed to start cutting rates,” Paul noted. “With consumers showing more restraint amid rising unemployment, we think the door is still open for two rate cuts this year.”
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,” Krosby 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…
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