The world’s largest bond market saw gains on Wednesday as a series of economic reports strengthened speculation that the Federal Reserve might cut interest rates this year to avert a larger U.S. economic slowdown. Treasury yields fell across the curve as data showed recurring jobless claims at their highest level since the end of 2021, and orders for U.S. business equipment matched the largest drop of the year. Additionally, an index of pending existing-home sales in the U.S. fell to a record low due to elevated mortgage rates and high prices, deterring potential buyers.
Chris Low of FHN Financial noted that the narrative of a slowing economy has gained traction. Jeff Roach at LPL Financial highlighted that rising continuing claims could indicate a softening labor market, which, combined with anticipated declines in both consumer and business activity, may prompt the Fed to cut rates later this year. The 10-year Treasury yield dropped by five basis points to 4.28%, ahead of a $44 billion sale of seven-year notes and the release of the Fed’s preferred inflation gauge on Friday.
Market Overview:- U.S. recurring jobless claims rise to the highest level since 2021.
- Orders for U.S. business equipment see the largest drop of the year.
- Treasuries climb as economic data fuels speculation of Fed rate cuts.
- 10-year Treasury yield declines five basis points to 4.28%.
- Fed officials indicate the possibility of rate cuts amid slowing inflation.
- S&P 500 (SPY) edges up, with mixed performance among megacaps.
- Monitoring U.S. labor market conditions and inflation data.
- Potential impact of Fed rate cuts on economic growth and markets.
- Ongoing analysis of market volatility and investment opportunities.
The equity markets responded to the bond market movements with mixed results. The S&P 500 edged up slightly, while most megacap stocks rose. Nvidia (NVDA) shares fell by 1.3% following disappointing results from Micron Technology (MU), which highlighted the challenges in the AI and semiconductor markets. Walgreens (WBA) tumbled over 20% after slashing its guidance due to a worsening retail environment. Traders are now pricing in about 45 basis points of easing in 2024, equivalent to less than two rate cuts, reflecting the growing expectation of a more accommodative Fed policy.
Stuart Paul at Bloomberg Economics noted that Friday’s personal consumption expenditures price data is expected to show the slowest increase this year, which would be welcome news for Fed officials. However, he cautioned that a significant cooling in the labor market is necessary for the Fed to start cutting rates. Quincy Krosby at LPL Financial warned that disappointing PCE data could spark stagflation fears, but better-than-expected data could ease market tensions heading into July.
Investors continue to navigate a volatile market landscape, with significant attention on the upcoming inflation data and Fed policy decisions. The potential for rate cuts has injected both optimism and caution into the markets, as stakeholders assess the implications for economic growth and corporate earnings.
