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U.S. Stocks, Bonds Drop As Data To Keep Pressure On Fed: Markets Wrap

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"It's almost impossible to argue for higher valuations which means it's very difficult to argue for higher stock prices," Morgan Stanley Chief US Equity Strategist Mike Wilson says during an interview with Jonathan Ferro on "Bloomberg The Open."
"It's almost impossible to argue for higher valuations which means it's very difficult to argue for higher stock prices," Morgan Stanley Chief US Equity Strategist Mike Wilson says during an interview with Jonathan Ferro on "Bloomberg The Open."

US stocks declined and Treasury yields stayed elevated after data signaled continued resilience in the labor market, which could keep pressure on the Federal Reserve to stay the course with its rate hikes.

The S&P 500 and the Nasdaq 100 fell after applications for US unemployment benefits eased last week. Treasuries dropped as data showed unit labor costs rising. Two-year, 10-year and 30-year Treasury yields are now above the 4% level, a sign that Fed warnings for higher-for-longer rates are finally sinking in. A dollar index rose.

“Demand for workers should ease as the effects of restrictive monetary policy take hold and spread more broadly through the economy,” wrote Rubeela Farooqi, chief US economist at High Frequency Economics. “But for now, companies appear to be hoarding workers, having struggled with labor shortages and staffing issues that are persisting.”

The focus now is on how much higher interest rates might go in the US and Europe, with swaps markets now pricing a peak Fed policy rate of 5.5% in September, and some even betting that the benchmark interest rate could rise to 6%. 

“Data releases like this are why policymakers continue to reiterate their intention to raise rates higher before pausing, and then leaving rates in a restrictive territory for quite a while,”  Jefferies economist Thomas Simons wrote in a note. “They recognize that inflation has come off the highs in recent months, but they are concerned that it will settle at a level above their 2% target. The bounce in the January data is exactly the sort of thing they are worried about.”

BloombergSurveillance: Early Edition, live from London and New York. Francine Lacqua, Anna Edwards, and Matt Miller deliver the latest news and analysis on the markets with leaders in global finance and economics. Societe Generale Chairman Lorenzo Bini Smaghi sees interest rates higher for longer on the back of a strong, resilient economy. Wells Fargo Macro Strategist Erik Nelson discusses the market impact of “higher for longer” interest rates.
BloombergSurveillance: Early Edition, live from London and New York. Francine Lacqua, Anna Edwards, and Matt Miller deliver the latest news and analysis on the markets with leaders in global finance and economics. Societe Generale Chairman Lorenzo Bini Smaghi sees interest rates higher for longer on the back of a strong, resilient economy. Wells Fargo Macro Strategist Erik Nelson discusses the market impact of “higher for longer” interest rates.

Data on Thursday also showed euro-area inflation slowed by less than anticipated and underlying price pressures surged to a new record, heaping pressure on the European Central Bank to drive up rates further. ECB interest rates are now seen rising above 4% and German benchmark bond yields traded above 2.7%. 

“We have upgraded our terminal Fed forecast to 5.75% which is above what markets are pricing — we do think the US economy is proving highly resilient because of excess savings and a strong labor market,” Thomas Hempell, head of macro and market research at Generali Investments, said in an interview. “Data has poured cold water on the disinflation process and markets are highly alert to anything that alters the inflation outlook.”

That’s damping appetite for risk-taking in markets around the world, with some even expressing concern that China’s post-Covid economic recovery could exacerbate global price pressures. 

China’s reopening is a much-needed bright spot for investors, but in terms of inflation “adds cyclical upside pressure because of the sheer amount of demand” that it brings, especially in commodities, Charu Chanana, senior markets strategist at Saxo Capital Markets, said on Bloomberg Television.

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 0.5% as of 9:30 a.m. New York time
  • The Nasdaq 100 fell 0.9%
  • The Dow Jones Industrial Average rose 0.2%
  • The Stoxx Europe 600 rose 0.1%
  • The MSCI World index was little changed

Currencies

  • The Bloomberg Dollar Spot Index rose 0.5%
  • The euro fell 0.6% to $1.0599
  • The British pound fell 0.8% to $1.1928
  • The Japanese yen fell 0.5% to 136.86 per dollar

Cryptocurrencies

  • Bitcoin fell 1% to $23,325.83
  • Ether fell 1.8% to $1,626.91

Bonds

  • The yield on 10-year Treasuries advanced eight basis points to 4.07%
  • Germany’s 10-year yield advanced three basis points to 2.74%
  • Britain’s 10-year yield advanced five basis points to 3.89%

Commodities

  • West Texas Intermediate crude rose 0.5% to $78.04 a barrel
  • Gold futures fell 0.3% to $1,839.50 an ounce

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