“If (CPI) comes in hot, investors will start to price
interest rates closer to where the Fed is and likely pressure
asset prices,” said Tom Hainlin, national investment strategist
at U.S. Bank Wealth Management. The firm is recommending clients
slightly underweight equities, expecting interest rate hikes to
hit consumer spending and corporate profits.
U.S. employment data for March, released Friday, showed
signs of persistent labor market tightness that could prompt the
Fed to hike rates again next month.
DIVERGING OUTLOOKS
Recession worries are mounting, with investors betting the
tumult in the banking system sparked by the March collapse of
Silicon Valley Bank will tighten credit conditions and hurt
growth.
In the bond market, the Fed’s preferred recession indicator
plunged to fresh lows in the past week, bolstering the case for
those who believe the central bank will soon need to cut rates.
The measure compares the current implied forward rate on
Treasury bills 18 months from now with the current yield on a
three-month Treasury bill.
Pricing in futures markets shows investors betting that
central bank easing later this year will drop the fed funds rate
from 4.75% to 5% currently to around 4.3% by year-end. Yet
projections from Fed policymakers show that most expect no rate
cuts until 2024.
"Financial markets and the Federal Reserve are reading from
two different playbooks," strategists at LPL Research said in a
note earlier this week.
Bets on a more dovish Fed have boosted tech and growth
stocks, whose future profits are discounted less when interest
rates fall. The S&P 500 technology sector has surged
6.7% since March 8, more than twice the gain for the overall
index over that time.
Economists polled by Reuters expect March data, due
April 12, to show the consumer price index climbed by 5.2% on an
annual basis, down from 6% the prior month.
Markets will also watch first-quarter earnings, which start in the coming week with major banks including JPMorgan and Citigroup due on Friday. Analysts expect S&P 500 earnings to fall 5.2% in the first quarter from the year-ago period, I/B/E/S data from Refinitiv showed.
For some investors, the Fed’s recent interventions to stabilize the banking system may have revived hopes of a so-called Fed-put, said Mark Hackett, chief of investment research at Nationwide, referring to expectations that the central bank will take action if stocks fall too deeply, even though it has no mandate to maintain asset prices. “If the Fed was trying to protect investors, one way would be to cut rates," Hackett said. "They haven’t done so yet, but the market is betting that they will, rightfully or wrongfully.” Still, a recession could pressure stock prices, even if it forces the Fed to cut rates sooner. Some investors worry that stock prices have not accounted for a drop in valuations and corporate earnings that would occur during a sharp slowdown. “One only needs to look back to 2001 or 2008 to see that a shift in Fed policy alone is not always enough to stop an economy on a downward trajectory or start a new bull market,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services, in a note earlier this week.
“Our view is the market is now baking in a lot of good news and leaving little margin for error,” he said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Stocks and bonds since the banking crisis ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Lewis Krauskopf; Additional reporting by Saqib Iqbal Ahmed and Davide Barbuscia; Editing by Ira Iosebashvili and David Gregorio)
Messaging: lewis.krauskopf.thomsonreuters.com@reuters.net, Twitter: @LKrauskopf))For the daily stock market report, please click ))
