(Bloomberg) — Wall Street's grappling with another mixed economic report has sent Treasury bonds lower, with traders betting the Federal Reserve will signal patience before deciding to cut interest rates this year.
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Yields rose across the U.S. curve as data showed private spending beat estimates – even as the Fed's preferred gauge of underlying inflation fell to a near three-year low. With policymakers telegraphing that they want to see sustained signs of a slowdown before cutting borrowing costs, the numbers only reinforce bets that a March turnaround remains very elusive at this point.
It's not that investors have given up their bets on a rate cut in the first quarter, but they have continued to fully price in a move in May. Of course, this all depends on the next economic reports, although the impact of shipping disruptions remains to be seen. As Jerome Powell and his colleagues meet next week, Wall Street will be waiting to hear how this all affects the balance of risk.
“It remains to be expected that the Fed will debate 'when' – not 'if' – it will initiate its rate-cutting cycle,” said Quincy Krosby of LPL Financial. “Unless next month’s collection of inflation-related data clearly underscores that the path to 2% is clearly in sight, the Fed will most likely wait until May or June to begin cutting rates.”
The two-year U.S. Treasury yield rose six basis points to 4.35%. After struggling for direction, the S&P 500 rose slightly. The value has increased for the seventh time in a row and is around 4,900. The tech-heavy Nasdaq 100 underperformed due to disappointing forecasts from Intel Corp. and KLA Corp. burdened the chip manufacturers.
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“The Fed's job is essentially done, and it has a good case for cutting interest rates and helping to contain risks in the labor market. Of course, the Fed could choose to be patient and wait for more evidence that inflation is in the bag. But markets are seeing the evidence and preparing for cuts in the next few months. I look forward to seeing how the latest PCE data will impact Jay Powell’s risk balance language after next week’s meeting.”
“The bigger picture is that the Fed doesn’t need to worry that stronger economic growth will fuel inflation, because that’s not the case. We expect rate cuts in 2024, starting in May, likely with four cuts of 25 basis points each.”
“The improving inflation trajectory is improving, giving the Fed room to cut rates this year. However, the Fed still has a lot of work to do and should not be tempted to declare that it is “mission accomplished.” Investors should not be surprised if goods inflation temporarily rises next month due to shipping disruptions.”
“A soft landing seems more and more obvious. The big question now is how quickly Jerome Powell will normalize politics if there is no immediate need. The data is less important going forward and internal conversations at the Fed are more important.”
“The FOMC does not need 2% year-over-year inflation to cut rates, but will be cautious given the possibility that the tight labor market and strong consumer growth could reignite inflationary pressures in the U.S. economy.”
“Considering how much inflation has slowed in recent months, a rate cut following the Fed's decision on March 20 is not out of the question. However, it is more likely that the Fed will wait until the second quarter to begin cutting interest rates.”
“After several weeks of hotter-than-expected economic data and inflation numbers, the Fed's preferred inflation indicator kept disinflation on track. While the news may provide some momentum to stock market bulls, the Fed will likely stick to its rate-cutting stance through the second half of the year.”
“Today’s reports are essentially neutral for Treasury yields and the dollar as inflation data was favorable but real spending growth was robust.”
“We do not expect the December data to materially change the March cut rates before the weekend. Instead, we will be watching next week's delivery announcements, the FOMC decision and payrolls to quickly bring the market into focus as the PCE data is processed.”
“We view today's PCE and private spending data as optimistic for both the Fed's path to its 2% target and for the stock market. Based on strong recent GDP and employment data, we expect the first rate cut to occur in the May-June period. If labor market and/or economic data weakens somewhat and inflation continues to fall rapidly, that could increase the chances of a rate cut in March, but that is not yet our base case.”
Elsewhere, Bitcoin rose above $41,000 as outflows from the $20 billion Grayscale Bitcoin Trust slowed, which strategists said could help stem a two-week slump in the token. Oil prices were heading for their biggest weekly gain since October as lower U.S. inventories and the prospect of more government stimulus in China helped push crude oil prices out of the range in which they have been stuck for months.
Company highlights:
Spirit Airlines Inc. slumped after JetBlue Airways Corp. announced that the planned takeover of the low-cost airline worth 3.8 billion US dollars could be completed in the coming days.
American Express Co. said it was sticking to its long-term profit and revenue targets and forecast 2024 profit that beat analysts' estimates.
Visa Inc. posted a profit that beat Wall Street forecasts as credit card spending rose amid strong U.S. economic growth.
Salesforce Inc. is cutting about 700 employees, adding to a brutal series of tech layoffs at the start of 2024.
T-Mobile US Inc. reported earnings that fell short of analyst estimates and dwarfed a surprisingly strong increase in new wireless customers.
Saudi Aramco, the world's largest oil company, continues to send tanker loads of crude and fuel through the southern Red Sea, where Houthi fighters have threatened merchant ships for months in response to Israel's war in Gaza.
Some of the key movements in the markets:
Shares
The S&P 500 rose 0.2% at 10:52 a.m. New York time
The Nasdaq 100 fell 0.1%
The Dow Jones Industrial Average rose 0.4%
The Stoxx Europe 600 rose 1.1%
The MSCI World Index rose 0.3%
Currencies
The Bloomberg Dollar Spot Index fell 0.1%
The euro rose 0.1% to $1.0861
The British pound rose 0.1% to $1.2721
The Japanese yen fell 0.3% to 148.10 per dollar
Cryptocurrencies
Bitcoin rose 3.4% to $41,271.13
Ether rose 1.7% to $2,256.55
Tie up
The 10-year Treasury yield rose three basis points to 4.15%
The 10-year German government bond yield rose two basis points to 2.31%
The yield on 10-year British government bonds has barely changed at 3.98%
raw materials
West Texas Intermediate crude fell 0.1% to $77.25 a barrel
Spot gold fell 0.2% to $2,017.35 an ounce
This story was produced with support from Bloomberg Automation.
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