Stocks Give Up Rally Above Key Mark After Fedspeak: Markets Wrap
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(Bloomberg) -- A rally in stocks fizzled out after two Federal Reserve officials signaled that interest rates could top 5%, throwing some cold water on traders who saw a peak below that mark.
The S&P 500 failed to stay above the key 3,900 level, erasing an advance that reached almost 1.5%. The Dow Jones Industrial Average underperformed, while the Nasdaq 100 rose thanks to gains in big tech, with Tesla Inc. surging about 6%. The dollar and Treasury yields pared their declines.
Fed Bank of San Francisco President Mary Daly said she expects the central bank to raise rates to somewhere over 5%. Her Atlanta counterpart Raphael Bostic noted that policymakers should hike above 5% by early in the second quarter and then go on hold for “a long time.”
Investors also awaited Thursday’s US CPI report that will come out almost a week after the latest jobs data showed that wage growth has decelerated. The figures will be among the last such readings Fed officials will see before their Jan. 31-Feb. 1 gathering.
“In addition to the probability of interest rates remaining high and a possible economic slowdown, any bullishness triggered by slowing inflation may be offset by stocks still-high valuations and overly optimistic earnings expectations,” said Chris Larkin at E*Trade from Morgan Stanley. “It could be a recipe for choppy near-term and long-term trading.”
Morgan Stanley’s Michael Wilson said that while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are indeed still too high. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, the strategist said.
His counterparts at Goldman Sachs Group Inc. expect pressure on profit margins, changes to US corporate tax policies and the likelihood of a recession to overshadow the positive impact from China’s economic reopening.
Still, the rising threat of an economic contraction has done nothing to dissuade Corporate America from spending big on its own shares. American firms announced a record $1.26 trillion of buybacks in 2022, up 3% from a year ago, according to data compiled by Birinyi Associates.
In corporate news, Apple Inc.’s push to replace the chips inside its devices with homegrown components will include dropping a key Broadcom Inc. part in 2025, according to people familiar with the situation. Jefferies Financial Group Inc. said profit tumbled amid a persistent deal slump that looks poised to crimp a key profit engine across Wall Street.
Elsewhere, equities in developing nations entered a bull market amid a rally fueled by optimism over China’s reopening and a weakening dollar. The MSCI Emerging Markets Index advanced 2.5% on Monday, taking its gains from an Oct. 24 low to over 20%.
Key events this week:
- US wholesale inventories, Tuesday
- Fed Chair Jerome Powell among speakers at Riksbank symposium in Stockholm, Tuesday
- World Bank expected to release global economic prospects report, Tuesday
- ECB Governing Council members speak at Euromoney conference in Vienna, Wednesday
- US CPI, initial jobless claims, Thursday
- St Louis Fed President James Bullard at Wisconsin Bankers Association virtual event, Thursday
- Richmond Fed President Thomas Barkin speaks at VBA/VA Chamber, Thursday
- China trade, Friday
- US University of Michigan consumer sentiment, Friday
- Citigroup, JPMorgan Chase, Wells Fargo report earnings, Friday
Some of the main moves in markets:
- The S&P 500 was little changed as of 4 p.m. New York time
- The Nasdaq 100 rose 0.6%
- The Dow Jones Industrial Average fell 0.3%
- The MSCI World index rose 0.7%
- The Bloomberg Dollar Spot Index fell 0.6%
- The euro rose 0.8% to $1.0734
- The British pound rose 0.7% to $1.2182
- The Japanese yen rose 0.2% to 131.82 per dollar
- Bitcoin rose 1.5% to $17,206.51
- Ether rose 4% to $1,319.87
- The yield on 10-year Treasuries declined three basis points to 3.53%
- Germany’s 10-year yield advanced two basis points to 2.23%
- Britain’s 10-year yield advanced five basis points to 3.53%
- West Texas Intermediate crude rose 1.4% to $74.82 a barrel
- Gold futures rose 0.3% to $1,874.50 an ounce
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