(Bloomberg) -- Wall Street got more signs the Federal Reserve’s war against inflation isn’t breaking the economy — or at least not yet — with traders sending Treasury yields soaring amid bets on further tightening.
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Bonds sold off across the curve, with two-year yields jumping 15 basis points to 4.86%. Swap markets now indicate a nearly 50% chance of a second Fed hike by year-end. The dollar rose. The S&P 500 posted a mild advance, with equities facing a lot of instability as traders adjusted their positions at the end of the quarter.
Banks led gains as the biggest lenders passed the Fed’s stress test, clearing the way for payouts. Wells Fargo & Co. and JPMorgan Chase & Co. rallied at least 3.5%. The Nasdaq 100 underperformed after soaring over 35% this year, buoyed by the artificial-intelligence hype. The Russell 2000 Index of small caps climbed 1.2%. In late trading, Nike Inc. whipsawed after mixed results.
Thursday’s readings on jobless claims and the gross domestic product showed the US economy is in better shape than many had envisioned at the start of 2023. While key gauges of inflation closely watched by the Fed have been revised down slightly, they still remain well above the central bank’s 2% target.
“The market is processing the recent strength in the economic data in both positive and negative ways,” said Carol Schleif, chief investment officer at BMO Family Office. “Solid economic data means that the economy is more resilient, but it also emboldens the Federal Reserve to keep raising interest rates.”
‘Haunt Investors’
Schleif noted that it’s very plausible that the Fed boosts interest rates in July — and perhaps again in September — especially if the economic data remains strong and if second-quarter earnings are better than expected.
In fact, market rate bets are aligning with Fed Chair Jerome Powell’s view that at least two hikes are likely necessary this year — and that acting at consecutive policy meetings isn’t “off the table.”
To Fawad Razaqzada at City Index and Forex.com, the fact that the economy continues to defy expectations should keep the doves at the Fed quiet for another couple of months at least.
“But the potential for interest rates to remain higher for longer is something that could ultimately haunt investors,” he noted.
After Thursday’s data came out, the US curve inversion intensified — with longer-dated yields rising less than shorter-maturity ones.
That means: the economy may look stronger now, but investors expect the Fed’s rate increases to curb future growth, which could boost the risk of a recession down the road.
Climbing a Wall of Worry
Despite all the jitters around a potential downturn and elevated inflation, the S&P 500 is close to wrapping up the first half of 2023 with a rally of about 15%. Traders have also climbed a wall of worry amid the collapse of some regional banks, geopolitical risks and the debt-ceiling debate.
And history suggests the bullish momentum could continue according to Adam Turnquist, chief technical strategist at LPL Financial. Since 1950, first-half gains of 10% or more have been followed by an average advance of 7.7% in the second half — with positive results 82% of the time, he noted.
While there could be some bumps along the way, the good news is that drawdowns in the second half tend to be shallower after a positive first half. In addition, a pullback in stocks could give investors “a buying opportunity into this new bull market,” Turnquist added.
Bearish Bets on Megacaps
Meantime, short sellers are stepping up bets against the largest technology companies at the heart of this year’s market gains, a sign that investors are growing more skeptical of the massive rally.
Short interest as a percentage of shares available to trade is near 12-month highs for Microsoft Corp., Tesla Inc. and Amazon.com Inc. according to data compiled by S3 Partners. In the last 30 days, traders have added to positions that would profit from declines in the shares of Apple Inc. to the tune of about $1 billion.
“Large cap equities and megacap tech names have jumped higher, providing a degree of relief for investors,” said John Lynch, chief investment officer at Comerica Wealth Management. “We remain concerned, though, that these moves are beyond optimism over growth prospects for AI, for example, and instead reflect misguided hopes for a change in the direction of monetary policy.”
Lynch expects the Fed to remain steadfast in its policy pursuits, with elevated rates and tighter credit standards weighing on the economy for the remainder of the year.
Key events this week:
China manufacturing PMI, non-manufacturing PMI, balance of payments, Friday
US personal income and spending, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The S&P 500 rose 0.4% as of 4 p.m. New York time
The Nasdaq 100 fell 0.2%
The Dow Jones Industrial Average rose 0.8%
The MSCI World index rose 0.2%
Currencies
The Bloomberg Dollar Spot Index rose 0.3%
The euro fell 0.4% to $1.0869
The British pound fell 0.2% to $1.2613
The Japanese yen fell 0.2% to 144.82 per dollar
Cryptocurrencies
Bitcoin rose 1.8% to $30,633.72
Ether rose 1.5% to $1,859.01
Bonds
The yield on 10-year Treasuries advanced 13 basis points to 3.84%
Germany’s 10-year yield advanced 10 basis points to 2.42%
Britain’s 10-year yield advanced seven basis points to 4.38%
Commodities
West Texas Intermediate crude rose 0.4% to $69.83 a barrel
Gold futures fell 0.3% to $1,915.90 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Brett Miller, Sujata Rao, John Viljoen, Peyton Forte, Carly Wanna and Michael Mackenzie.
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2023-06-29 20:02:47Z
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