Yahoo Finance Treasuries Rally With Fed Not as Hawkish as Feared: Markets Wrap
(Bloomberg) -- Bonds rallied after Jerome Powell downplayed the possibility of interest-rate hikes and the Federal Reserve said it will shrink its balance sheet at a slower pace to ease strains in money markets.
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Treasuries climbed across the curve, with two-year yields dropping below 5%. Swap traders boosted bets on policy easing in 2024. At one point, markets were headed for their biggest cross-asset surge on a Fed day this year. Moves abated toward the close, with the S&P 500 turning lower as chipmakers plunged in the final hour of trading. The yen soared, fueling speculation Japan could be intervening to support the currency.
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Officials unanimously decided Wednesday to leave the target range for the benchmark federal funds rate at 5.25% to 5.5% — where it’s been since July. Powell noted it’s unlikely the Fed’s next move would be to raise rates, saying officials would need to see persuasive evidence that policy is not tight enough to bring inflation back toward the central bank’s 2% target.
“Jay Powell threaded the needle perfectly today,” said Ronald Temple at Lazard. “He did not take the bait to talk about hiking rates. I believe the FOMC’s cautious approach will be a winner over time as inflation subsides as we progress through the year.”
US 10-year yields fell five basis points to 4.63%. In a volatile session, the S&P 500 extended this week’s losses — with traders seeing Friday’s jobs report as the next big catalyst. After the close of regular trading, Qualcomm Inc., the biggest seller of smartphone processors, gave a bullish forecast.
“The basic message was that cuts have been delayed — not derailed,” said Krishna Guha at Evercore. “Relative to expectations, this is a very measured hawkish reset.”
While the Fed signaled it’s not planning to cut rates so soon, the fact that officials are slowing the pace at which they shrink their balance sheet, it will mean less upward pressure on bond yields, according to Sonu Varghese at Carson Group.
In the plan unveiled Wednesday, the Fed said it will lower the monthly cap on how much Treasuries it will allow to mature without being reinvested, to $25 billion from $60 billion, while keeping the cap for mortgage-backed securities unchanged at $35 billion.
The central bank has been winding down its holdings since June 2022 — a process known as quantitative tightening. It gradually increased the combined amount of Treasury and mortgage bonds it allowed to run off without being reinvested to a total of $95 billion per month.
To Ian Lyngen at BMO Capital Markets, QT tapering combined with the Treasury Department’s $10 billion per month in buybacks represent a constructive shift in the flow dynamics for the US rates market.
“The less Treasury debt that rolls off the Fed’s balance sheet, the less debt that has to be absorbed by the market,” said Greg McBride at Bankrate. “This could help keep long-term Treasury yields in check after heady increases thus far in 2024.”
Wall Street’s Reaction to Fed:
Neil Dutta at Renaissance Macro Research:
The statement retains its easing bias. In the press conference, Powell believes that policy is restrictive. If policy is restrictive, they are more concerned about downside growth risks than upside inflation risks.
Bret Kenwell at eToro:
The Fed might not be confident enough to cut rates yet, but notably, the idea of rate hikes doesn’t appear to be on the table.
The Fed’s plan to slow its balance sheet runoff should be a positive for the bond market, and it’s something the committee likely wouldn’t do if it felt that it would need to raise rates in the not-too-distant future.
Seema Shah at Principal Asset Management:
After a spate of strong inflation numbers, the Fed cannot pretend that recent inflation surprises are simple blips in the data run. Yet Powell retains some confidence that inflation will decline from here, albeit lessened over recent months, suggesting that it’s a fairly high bar for rate hikes.
Yet, before markets get overly excited, it’s worth remembering that the Fed is responding to the unfolding economic data, just as we all are. The next few months of data are pivotal for the Fed path.
Quincy Krosby at LPL Financial:
The FOMC statement offered the market liquidity, with a larger than expected QT slowdown in exchange for more time needed to assess the path of disinflation and timing for initiating rate cuts.
The statement wasn’t as hawkish as market participants anticipated as there wasn’t a hint of a potential rate hike, just a suggestion of remaining higher for perhaps longer than an eager market is comfortable with.
Whitney Watson at Goldman Sachs Asset Management:
US growth and inflation exceptionalism in the first quarter suggest the Fed will exercise patience before pivoting to rate cuts, spending the second quarter regaining confidence on disinflation.
We expect the downtrend in inflation has been delayed, not derailed. As for the Fed’s balance-sheet reduction, today’s decision to taper quantitative tightening is a nod to liquidity considerations in the financial system, rather than a shift in direction.
Steve Sosnick at Interactive Brokers:
Pulling back on QT is the noteworthy aspect, particularly because cutback is strictly on the Treasuries side while agencies and mortgages remain unchanged. A bit of dovishness to balance the acknowledgement of lack of progress on inflation.
Wall Street lore says traders should dump stocks in May to avoid the summer doldrums. But that strategy appears to have been a bust in recent memory.
The old Wall Street adage “sell in May and go away” refers to a six-month stretch from May to October that historically has been the worst time to own stocks — but that hasn’t been the case lately. In fact, the S&P 500 has delivered gains in eight of the past 10 years during this time frame, with an average return of 4%, data compiled by Bloomberg show.
That said, this span still hasn’t beaten the best six months of the year on average for US equities in the past 70 years: November to April.
Last month’s slide in the S&P 500 drove sell-side strategists out of equities and bonds and into cash, bringing a contrarian sentiment barometer from Bank of America Corp. closer to signaling it’s time to buy US stocks.
BofA’s so-called Sell-Side Indicator ticked down 33 basis points in April to 54.6%, bringing it just below its 15-year average, strategists led by Savita Subramanian wrote in a note to clients Wednesday.
Corporate Highlights:
EBay Inc. declined after giving a weak forecast for the current quarter, reinforcing investor worries that the one-time pioneer continues to lose relevance in a maturing e-commerce market crowded with competitors.
American International Group Inc. reported profit above analysts’ estimates in the first quarter as lower-than-expected catastrophe losses contributed to strong underwriting results.
UnitedHealth Group Inc. Chief Executive Officer Andrew Witty told lawmakers his company is still trying to determine why its computer systems were left vulnerable to hackers who perpetrated a devastating cyberattack.
Allstate Corp. reported earnings that beat estimates as the property and casualty insurer benefitted from lower catastrophe losses.
DoorDash Inc., the largest food delivery service in the US, offered a disappointing profit forecast for the current quarter as the company invests in expanding its list of non-restaurant partners and improving efficiency.
Carvana Co. reported stronger earnings with revenue topping expectations as the company digs into its restructuring plan and regains sales momentum.
Zillow Group Inc. shares fell after the real estate company published a second-quarter outlook that called for lower revenue in its core business and predicted stalling growth in the broader US housing market.
Mastercard Inc. cut a forecast for full-year revenue growth citing foreign exchange headwinds, as first-quarter spending on the payments giant’s network fell short of estimates.
New York Community Bancorp Inc. posted results that were better than feared and executives outlined a plan for reshaping it into a more diversified and profitable bank.
Key events this week:
Eurozone S&P Global Manufacturing PMI, Thursday
US factory orders, initial jobless claims, trade, Thursday
Apple earnings, Thursday
Eurozone unemployment, Friday
US unemployment, nonfarm payrolls, ISM Services, Friday
Chicago Fed President Austan Goolsbee speaks, Friday
Some of the main moves in markets:
Stocks
The S&P 500 fell 0.3% as of 4 p.m. New York time
The Nasdaq 100 fell 0.7%
The Dow Jones Industrial Average rose 0.2%
The MSCI World index fell 0.3%
Currencies
The Bloomberg Dollar Spot Index fell 0.2%
The euro rose 0.2% to $1.0689
The British pound was little changed at $1.2491
The Japanese yen rose 0.2% to 157.51 per dollar
Cryptocurrencies
Bitcoin fell 4.7% to $57,030.77
Ether fell 1.3% to $2,924.73
Bonds
The yield on 10-year Treasuries declined five basis points to 4.63%
Germany’s 10-year yield advanced five basis points to 2.58%
Britain’s 10-year yield advanced two basis points to 4.37%
Commodities
West Texas Intermediate crude fell 3.4% to $79.11 a barrel
Spot gold rose 1% to $2,308.04 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Jessica Menton, Natalia Kniazhevich and Lu Wang.
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