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S&P ~flat; Dow Jones down; Nasdaq up
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Utilities lead S&P sector gainers; comm svcs biggest loser
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Dollar up; gold, crude, bitcoin down
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U.S. 10-year Treasury yield edges up to ~3.62%
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DANSKE BANK SEES FED CUTTING RATES STARTING Q1 2024 (1344 EDT/1644 GMT) With banking stress somewhat easing amid improving U.S. financial indicators such as rising deposits and lower demand for emergency funding, investors and market participants have shifted their focus to the macro narrative and the outlook for U.S. interest rates. Danske Bank writes in a research note that it expects the Federal Reserve to deliver a final interest rate increase of 25 basis points next month and to keep policy rates unchanged until Q1 of 2024, when a gradual easing cycle starts. The Danish bank sees longer-term U.S. Treasury yields peaking "now" and expect them to stay around current levels until the fall this year before starting to decline gradually, reflecting the expected easing cycle in 2024.
The 10-year yield touched a 15-year high of 4.338% in October 2022, and has been downward trend since then. On Wednesday, 10-year yields were at 3.62% The bond market, though, has priced in three rate cuts of 25 basis points each between June and December this year.
While Danske does not share this view, it does not expect a a major re-pricing posing considerable upside risk to longer-term U.S. yields. The bank notes that markets are focusing on the next big move in rates markets, which is likely to be for lower rates.
Historical evidence shows that, on average, the Fed has started cutting policy rates three quarters after the last rate hike. Danske currently expect a first rate cut from the Fed in Q1 24 followed by a sequence of cuts at a pace of one cut per quarter through 2024. This should likely support the lower rates narrative starting in autumn this year in anticipation of monetary policy easing.
(Gertrude Chavez-Dreyfuss)
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STOCKS TEND TO DO THIS AFTER THE LAST FED RATE HIKE -WFII
(1225 EDT/1525 GMT)
The Wells Fargo Investment Institute (WFII) is expecting the
Federal Reserve to lift rates two more times this year before a
pause.
While there is some debate over just how many more rate
hikes the Fed will fire off - some forecast one additional hike
or none at all - WFII does believe the end of the tightening
cycle is near.
How have stocks behaved typically after the the final hike?
WFII investment strategy analyst Austin Pickle, says since 1989, stocks have rallied after the hiking cycle headwind is removed. However, outside of the 1995 "no landing" scenario, "the rally fizzles out and stocks are dragged lower as the macro environment deteriorates." According to Pickle, similar to past cycles, removing the uncertainty of additional hikes will likely be supportive for equities this time around. In fact, WFII believes that much of the 15% S&P 500 index advance since the October 2022 low has been from markets anticipating the eventual end to rate hikes. However, as markets then refocus on deteriorating economic and earnings realities, stocks are likely to struggle. Pickle's bottom line is "We reiterate our guidance to utilize rallies to trim lower-quality areas and favor redeploying capital in high-quality, larger-cap companies that have strong balance sheets and cash flow in an effort to weather the worsening macro environment that we see ahead."
(Terence Gabriel)
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HOUSE OF MIRRORS: MORTGAGE RATES FOLLOW YIELDS HIGHER, LOAN
DEMAND SLIDES (1115 EDT/1415 GMT)
The cost of financing home loans resumed its uphill climb
last week, sending mortgage demand down by 8.8%, according to
the Mortgage Bankers Association (MBA).
The average 30-year fixed contract rate , jumped
13 basis points to 6.43%, aping the recent bounce-back in
benchmark Treasury yields .
As a result, applications for loans to purchase homes slid by 10.0%, while refi demand dropped 5.8%.
"With more first-time homebuyers in the market, we continue
to see increased sensitivity to rate changes," writes Joel Kan,
deputy chief economist at MBA. "Affordability challenges persist
and there is limited for-sale inventory in many markets across
the country, so buyers remain selective on when they act."
"Low for-sale inventory continues to constrain sales, along with mortgage rates that remain above 6 percent," Kan says. They've been above 6% since September, in fact. And while they've cooled from the 7.16% apex touched in late October, combined with low inventories and tighter lending conditions - a result of restrictive Fed policy combined with recent pressures on the regional banking system - fewer potential buyers can afford monthly payments or qualify for financing. Overall mortgage demand, despite showing stirrings of a comeback in recent weeks, is down 44.1% from the same week a year ago. Recent housing data has been messy, and seemingly contradictory. Homebuilder sentiment has grown less pessimistic this month, the most recent Case-Shiller print shows home price growth - an enormous barrier to entry in recent years - at its coolest since November 2019. But then data on Tuesday showed building permits - among the most forward looking housing indicators - plunged by 8.8% last month. The National Association of Realtors is due to release March existing home sales data on Thursday, which are seen dipping 1.7% after having rebounded in February to a six-month high. So the question remains - has the housing market found its basement? Recent economic data make that question difficult to answer. But if you turn your attention to the stock market, which reflects where investors believe the sector will be six months to a year down the road, housing is due for a renovation. Rebased to a year ago, the S&P 1500 Home Building index and the Philadelphia SE Housing index are up 34.5% and 11.3%, respectively. That's a far cry better than the broader S&P 500's 6.9% drop over the same time period: Rising Treasury yields and a mixed bag of earnings dampened investor risk appetite in late morning trading. All three major U.S. stock indexes were modestly red, with interest rate sensitive megacaps weighing heaviest.
(Stephen Culp)
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WALL STREET SHARES OPEN ON THE DEFENSIVE (1021 EDT/1321 GMT) Shares on Wall Street are in the red early on Wednesday, pressured by the rise in Treasury yields on expectations the Federal Reserve will keep rates higher for longer. The Fed meeting is in two weeks and a 25 basis-point hike has been baked in. There is speculation as well that the Fed could also hike in June. Mixed earnings so far are also weighing on the market led by banks. Morgan Stanley reported a fall in quarterly profit, a day after rival Goldman Sachs Group Inc GS.N posted a 19% drop in profit on hit to dealmaking and losses from the sale of some assets in its consumer business.
The communications services sector leads all
decliners on the S&P.
Brian Reynolds, chief market strategist, at Reynolds
Strategy, suggests in a research note though to buy market
declines. He points out that "cities and states have bulging
cash positions that they are allocating to their pensions."
On the other side, he recommends selling stock market
rallies, given the debt ceiling situation and uncertain outlook
on bank deposits.
Here's an early market snapshot
(Gertrude Chavez-Dreyfuss)
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FOR WEDNESDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT -
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(Reporting by Gertrude Chavez-Dreyfuss)
