Wall Street got some encouragement to send stocks higher after a slowdown in inflation bolstered speculation the Federal Reserve will pause its tightening campaign on Wednesday.
That’s not to say investors are betting the Fed is done with its interest-rate hikes just yet. While swap traders are putting the odds of a June increase at only 10%, they still see the potential for a July move. And to some of the world’s biggest money managers, the central bank will continue to sound hawkish even if it stays on hold this week.
Tiffany Wilding at Pacific Investment Management Co. expects the Fed to signal the market should not interpret a potential pause as the end of hikes. Alexandra Wilson-Elizondo at Goldman Sachs Asset Management, sees a “hawkish pause” as the rate of disinflation remains incompatible with the Fed’s 2% target. Meantime, UBS Chief Investment Office bets officials will send a “clear message” that at least one more increase is likely at a later meeting.
“The Fed is comfortable pausing the hiking cycle in June, provided there is a strong statement of their intention to raise rates again should it be required,” said James Athey, investment director at Abrdn.
Short-term Treasury yields surged to the highest levels since March amid a decline in expectations that the Fed will cut interest rates this year. Two-year rates, which are more sensitive to imminent policy moves, climbed 10 basis points to 4.68%.
Powell and stock rally
The S&P 500 rose for a fourth consecutive day — its longest winning run since early April — and approached the 4,400 mark. Wall Street’s “fear gauge” — the Cboe Volatility Index — dropped back below 15. That compares with an average of 23 for the VIX in the past year.
Ian Lyngen at BMO Capital Markets says he’ll be on the lookout for any comments from Jerome Powell regarding the recent breakout in the US equity benchmark that reached its highest level since April 2022. Back in December, the Fed Chair highlighted the importance of financial conditions continuing to reflect the policy restraints put in place to tame inflation.
“We expect the performance of risk assets will be an issue that is discussed by the Fed,” Lyngen wrote in a note to clients.
“The VIX has begun to consolidate <15, which has also contributed to the overall loosening in financial conditions.”
‘Dot plot’
In addition to the Fed decision on rates, investors’ focus will be on the central bank’s quarterly so-called dot plot in its Summary of Economic Projections.
“Raising the ‘dots’ for both 2023 and 2024 would signal an intention to leave rates higher for longer, while also giving the doves on the committee another few weeks to prove that inflationary pressures are waning,” the UBS Chief Investment Office added.
The consumer price index and the core CPI — which excludes food and energy — decelerated on an annual basis.
However, a key gauge of prices closely watched by the Fed continued to rise at a concerning pace.
“Today’s US CPI has likely sealed the deal for a ‘hawkish hold’,” said Matthew Weller at FOREX.com and City Index.
“With no upside surprises to inflation, it looks likely that Jerome Powell and company will follow through on their recent comments favouring a ‘skip’ in the interest rate hiking cycle tomorrow, while leaving the door open for a potential resumption of rate increases next month if the data dictates.”
Elsewhere, oil rebounded by more than 3% from a three-month low as China weighed measures to revitalise the world’s second-largest economy. West Texas Intermediate futures topped $69 a barrel after three losing sessions.
Key events this week:
- Eurozone industrial production, Wednesday
- US PPI, Wednesday
- Federal Reserve rate decision, updated economic forecasts, Jerome Powell’s press conference, Wednesday
- IEA oil market report, Wednesday
- China property prices, retail sales, industrial production, Thursday
- European Central Bank President Christine Lagarde holds press conference following the rate decision, Thursday
- US initial jobless claims, retail sales, empire manufacturing, business inventories, industrial production, Thursday
- Bank of Japan rate decision, Friday
- US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.7% as of 4 p.m. New York time
- The Nasdaq 100 rose 0.8%
- The Dow Jones Industrial Average rose 0.4%
- The MSCI World index rose 0.8%
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.3% to $1.0791
- The British pound rose 0.8% to $1.2608
- The Japanese yen fell 0.4% to 140.21 per dollar
Cryptocurrencies
- Bitcoin was little changed at $25,886.45
- Ether was little changed at $1,739.66
Bonds
- The yield on 10-year Treasuries advanced nine basis points to 3.82%
- Germany’s 10-year yield advanced three basis points to 2.42%
- Britain’s 10-year yield advanced 10 basis points to 4.43%
Commodities
- West Texas Intermediate crude rose 3% to $69.15 a barrel
- Gold futures fell 0.7% to $1,956.60 an ounce
Additional reporting by John McCorry, John Viljoen, Isabelle Lee, Cecile Gutscher, Sagarika Jaisinghani, Julien Ponthus, Peyton Forte, Allegra Catelli, Blaise Robinson, Carly Wanna, Emily Graffeo, Brett Miller and Tassia Sipahutar.
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