Treasury Yields Rise in Volatile Session as Mixed Economic Reports Signal Fed’s Next Move
In a volatile session, Treasury yields rose as mixed economic reports signaled that the Federal Reserve may still cut interest rates this year, but will be in no rush to do so. Bonds dropped across the US curve after data showed persisting inflation and sluggishness in retail sales. Fed swaps trimmed the odds of policy easing in 2024, with cuts now likely starting in July. The S&P 500 erased gains, showing a lack of conviction in the equity market.
The producer price index rose the most in six months, following consumer-price data earlier this week that also signaled a pickup in cost pressures. US retail sales rose by less than forecast after a steep drop to start the year, underscoring concerns about the durability of consumer spending.
Chris Low at FHN Financial commented, “Well, this is a ‘pickle’. On the heels of a second steamy CPI, and just a week before the Fed meeting, the February PPI rises at twice the expected pace — while retail sales were ‘meh’ at best, if not downright weak.”
US two-year yields rose five basis points to 4.68%, while the S&P 500 hovered around 5,160. The dollar advanced.
Analysts noted that the economic updates did not offer anything new for next week’s Fed meeting. The pace of retail sales during the first quarter hints at the specter of stagflation, with sticky inflation combined with signs of softness elsewhere in the economy. The market is now questioning how soon the Fed will cut rates and whether that will slow down the stock market rally.
The bottom line is that while consumers have more capacity to spend, consistent downward revisions suggest the economy is slowing. The Fed has already stated that rate cuts are coming, and June still appears to be the most likely candidate for the first rate cut.
February’s producer price index report suggests that the tailwind of “transitory” inflation dropping out of the US economy has ended, with input prices now arguably a neutral factor in helping the Fed guide inflation down to 2%. The smooth landing to a 2% inflation rate continues to be bumpy, with early signs of a restock of inventories affecting goods prices.
In corporate news, President Joe Biden called for United States Steel Corp. to retain American ownership amid moves by Nippon Steel Corp. to purchase the company. Dollar General Inc. and Dick’s Sporting Goods Inc. reported positive sales outlooks, while BNP Paribas SA reduced bonuses across its investment banking division.
Overall, the market remains uncertain about the Fed’s next move and how it will impact the economy and stock market. Investors will be closely watching upcoming economic events and data releases to gauge the future direction of interest rates and market trends.
