Recession Worries Boost Treasuries; Stocks Advance: Markets Wrap

(Bloomberg) -- US Treasuries rallied after another batch of economic data fell short of expectations, ratcheting up recession worries. American equities advanced as the decline in yields made stocks relatively more attractive.

The S&P 500 ended almost 1% higher after waffling throughout the day, and is now up more than 3% in the past three days. The tech-heavy Nasdaq 100, whose members have been more sensitive to the rise in bond yields, jumped 1.5%. The 10-year yield fell back below 3.10% just nine days after spiking to within a whisker of 3.50%. Commodities from oil to copper remained under pressure as signs of waning demand mounted. 

Data on Thursday did little to boost sentiment about a global economy battered by a flurry of central bank rate increases. Jobless claims hovered near a five-week high, while manufacturing and services activity in the US cooled in June, lagging estimates and adding to worries the Fed’s efforts to fight inflation will upend growth. 

Federal Reserve Chair Jerome Powell said in testimony to the US House that his commitment to bring down price increases is “unconditional,” a characterization he made at last week’s Fed meeting but one he omitted before lawmakers Wednesday. Fed Governor Michelle Bowman also said she supports raising interest rates by 75 basis points again in July, followed by a few more half-point hikes.

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“With Chairman Powell finally acknowledging that while a soft landing is possible, however difficult, and that the Fed’s commitment towards curtailing inflation may lead the economy into a recession, the market is wavering between a growth scare and an all out recession,” Quincy Krosby, chief equity strategist at LPL Financial, said in a note.

The S&P 500 had risen more than 2% Tuesday on speculation after back-to-back weekly routs of more than 5% each had reset valuations in line with the Fed’s policy moves. Volatility remains elevated across assets, though, as economists debate whether the world’s largest economy is robust enough to withstand a Fed that looks poised to raise rates at least 50 basis points each at its next three meetings. 

“The problem is, if the Fed does pivot earlier than people thought it’ll only be because the economy is a lot weaker than people thought and the stock market is a lot lower than people thought,” said Matt Maley, chief market strategist at Miller Tabak + Co. “So people need to be careful about looking for a Fed pivot early. If the Fed pivots early it will be because we’re in really rough shape, and that’s not bullish.”

Traders are now starting to price out any action on rates beyond the December meeting with latest data showing an additional 175 basis points of hikes priced before that meeting. 

The dollar was little changed. Powell, on Thursday, said that US debt is on an “unsustainable path” which could be a concern for the dollar over the long term. Bitcoin climbed back above $20,000. A digital dollar should be backed by the government, according to Powell, who rejected the idea of a private stablecoin during his testimony.  

How will the second half of this year play out for major asset classes? We are re-running MLIV’s 2022 asset survey from December to see how street views have evolved amid the turmoil and volatility in the past few months. Click here to participate anonymously.

What to watch this week:

• US University of Michigan consumer sentiment, Friday
• RBA’s Lowe speaks on panel, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1% as of 4 p.m. New York time
• The Nasdaq 100 rose 1.5%
• The Dow Jones Industrial Average rose 0.6%
• The MSCI World index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.4% to $1.0529
• The British pound was unchanged at $1.2266
• The Japanese yen rose 1% to 134.93 per dollar

Bonds

• The yield on 10-year Treasuries declined seven basis points to 3.08%
• Germany’s 10-year yield declined 21 basis points to 1.43%
• Britain’s 10-year yield declined 18 basis points to 2.32%

Commodities

• West Texas Intermediate crude fell 2% to $104.06 a barrel
• Gold futures fell 0.6% to $1,828 an ounce

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