Stocks, Bonds Stuck In Range As Inflation Persists: Markets Wrap

(Bloomberg) -- US stocks and bonds traded sideways after a brief rally at the open on data that showed inflation moderated last month, but not enough to forestall the Federal Reserve from raising interest rates at least one more time this year.

The S&P 500 edged up  as the Nasdaq 100 wobbled between gains and losses. The tech-heavy gauge has fallen in five of the past six sessions. Policy-sensitive two-year Treasury yields tumbled as much as 15 basis points before paring the drop to trade at %. Swaps markets showed the odds are still in favor for a Fed rate hike in May while traders amped up bets the central bank will cut rates later this year.

Markets rallied early in the session after data showed US consumer prices rose 0.1% in March, just below economists’ forecast of 0.2%. The closely watched core CPI number — which excludes food and energy — increased 0.4%, meeting the median estimate and coming on the heels of the prior month’s 0.5% gain. Investors will be dissecting Thursday’s producer prices report next.

Data hinting at a slowdown in economic growth could catalyze equities to move lower, according to Eric Johnston, head of equity derivatives and cross assets at Cantor Fitzgerald. Already, he says the economy is slowing, and “equities will begin to price that in very shortly.”

“Stocks have been helped the past month by CTA buying of US equities and due to global liquidity flows, and we think both are about to stop or reverse,” he said referring to the commodity trading advisers that make rules-based bets in futures markets.

Fed officials scaled back expectations for peak rates as policymakers sought to balance reining in inflation and steadying the banking sector, according to minutes of the March Federal Open Market Committee released Wednesday. Fed staff are now expecting a “mild recession” later this year. Earlier, San Francisco Fed President Mary Daly said more rate hikes may not be needed.

Some of the biggest banks in the US are expected to report earnings on Friday.

Liz Young, head of investment strategy at SoFi, expected markets to swing intraday, CPI data was not “below expectations in a meaningful way.” She sees Thursday’s producer price report providing added clarity.

“What closes the loop on this inflation data is actually the PPI data,” Young said. “Although CPI has been moderating, which is definitely good news, if PPI remains sticky or slightly higher than expectations, that’s where you see the knock-on effect on corporate margins.”

Elsewhere, the dollar fell against a basket of all its G-10 peers while Bitcoin slumped, dipping below $30,000 after hitting its highest since June on Tuesday. Oil climbed to the highest intraday level this year as crude futures topped $83 a barrel. 

Here’s what else Wall Street had to say about CPI data:

“The March inflation data confirms that the disinflationary process is intact, but moving very slowly. Core CPI is still running far above target.”

 “The Fed would have to see a slowdown in core CPI to accept that monetary policy has been tightened far enough. Absent that evidence today, we expect to see another 25 basis point hike in May before the Fed pauses.”

“Today’s data release will most likely be perceived as welcome news because headline was marginally light of expectations and core was in-line.”

“The continued strength in the core figure is not consistent with the Federal Reserve’s 2% long-term target and will keep a 25-bps hike on the table for the May meeting. However, the data release does not yet reflect post-banking stress information and the subsequent tightening of credit conditions.”

“Ultimately you can really only justify these strong moves in the equity market if you believe that the soft landing probability is increasing materially.”

“It’s a good thing when inflation prints are in line with expectations, it’s much better than an upside surprise. But to me, this is still a very, very strong, inflationary pressures report, so it certainly doesn’t signal the all clear.”

“Last year saw a substantial equity selloff as higher interest rates pushed investors out of expensive stocks. Now we are nearing the end of the hiking cycle (though not there yet) and the market is getting excited about stocks again. We think this is wrong.”

“The hiking cycle will only end when the economy slows substantially – we see no other way for inflation to disappear. And this is not going to be good news for equity investors as a decline in earnings would hurt more than an offsetting rate cut.”

“Core inflation remains stubbornly high and an increasingly bullish outlook for energy prices will continue to justify higher for longer. Equities remain expensive and we retain our defensive positioning.”

“You can’t go from a decade of ultra-low interest rates to the fastest rate hike cycle in over 40 years without systemic repercussions, not just to the banking sector but the economy as a whole. We are heading into recession and whether we get an additional rate hike or not, inflation remains an issue, despite today’s number. The writing is already on the wall.”

“The key core rate has risen slightly, so the inflationary pressure remains high, the Fed will probably continue to raise interest rates but less aggressively because of the incidents in the banking sector. The market sees the peak within reach.”

“CPI is good news all round. Not only did energy inflation become materially negative as expected, food inflation stalled and shelter inflation is cooling off. All that indicates that the Fed remains on the right track in bringing inflation down. While core inflation keeps on rising, the main drivers of core inflation in recent months are mostly cooling off, indicating that the Fed may be able to stop hiking rates after the next meeting.”

Key events this week:

• Richmond Fed’s Thomas Barkin speaks, Wednesday
• China trade, Thursday
• US PPI, initial jobless claim, Thursday
• US retail sales, business inventories, industrial production, University of Michigan consumer sentiment, Friday
• Major US banks JPMorgan Chase, Wells Fargo and Citigroup report earnings, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.4% as of 2:21 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average rose 0.6%
• The MSCI World index rose 0.5%

Currencies

• The Bloomberg Dollar Spot Index fell 0.5%
• The euro rose 0.8% to $1.0998
• The British pound rose 0.6% to $1.2494
• The Japanese yen rose 0.4% to 133.20 per dollar

Cryptocurrencies

• Bitcoin fell 0.5% to $30,039.82
• Ether rose 1.2% to $1,917.93

Bonds

• The yield on 10-year Treasuries was little changed at 3.42%
• Germany’s 10-year yield advanced six basis points to 2.37%
• Britain’s 10-year yield advanced three basis points to 3.57%

Commodities

• West Texas Intermediate crude rose 2.1% to $83.28 a barrel
• Gold futures rose 0.5% to $2,028.30 an ounce

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Macarena Muñoz, Sagarika Jaisinghani, Isabelle Lee and Allegra Catelli.

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