(Bloomberg) — Stocks took a hit as a selloff deepened in the world’s largest bond market amid speculation that the Federal Reserve will not cut interest rates before July amid inflation risks.
After a recent rally, stocks lost momentum on Tuesday as a report on US providers showed that a measure of prices reached the highest level since early 2023. The sell-off in big tech companies weighed heavily on Wall Street trading, with the S&P 500 falling by more than 1% and the S&P 500 index fell more than 1%. The Nasdaq 100 fell nearly double. Nvidia Corp. sank 6.2%. Treasuries fell across the curve, with a $39 billion sale of 10-year bonds generating the highest yield since 2007. The market was also under pressure amid a wave of investment-grade deals.
“Rising yields aren’t necessarily a problem for stocks unless the economy starts to fail, of course. Then all bets are off,” said Kenny Polcari of SlateStone Wealth. “But rising yields will be a problem if inflation rears its ugly head.”
For FHN Financial’s Mark Strieber, the latest U.S. services report supports the Fed’s recent comments that interest rate cuts are likely to slow in 2025 due to upside price risks. Atlanta Fed President Rafael Bostic said officials should be cautious given the uneven progress in lowering inflation.
“The Fed will likely shift from cutting rates at every decision, as it did between September and December, to pausing between rate cuts in 2025,” said Bill Adams of Comerica Bank.
Separate data on Tuesday showed that job openings rose to a six-month high in November, supported by a jump in business services – while other industries showed more mixed demand for workers.
The S&P 500 briefly fell below 5,900. The Nasdaq 100 fell 1.8%. The Dow Jones Industrial Average fell 0.4%. The Magnificent Seven Megacaps metric fell 2.5%. The Russell 2000 index of small companies fell 0.7%.
The yield on 10-year Treasury bonds rose six basis points to 4.69%. In the UK, 30-year bond yields are at their highest levels since 1998, raising the possibility of higher taxes to meet fiscal rules. Bitcoin fell below $100,000.
With Treasury yields rising again, strategists at Bank of America expect traders to return to viewing strong economic data as negative, as it suggests the Fed will need to keep interest rates high for longer.
The team led by Osung Kwon said that fear of growth is easing with increasing focus on inflation and interest rates.
Swap traders, who in late September were fully pricing in another Fed rate cut by March, have called off bets there will be a cut through the second half of the year.
Another indicator of concern in the bond market can be seen in a measure called the premium term, which is the additional yield required by investors for holding long-term debt rather than rolling over short-term securities at maturity. It recently reached the highest level since 2015.
Equity investors will also suffer if Treasury yields remain high and companies have to face ever-higher borrowing costs, according to Torsten Slok of Apollo Global Management.
According to Lauren Goodwin of New York Life Investments, because the growth outlook is optimistic, unless we see an employment or inflation shock, investors should give the market the benefit of the doubt.
“Our baseline view of the US economy is a constructive view – that US activity will approach its long-term trend of 2% for the year – but this still calls for a modest slowdown over the course of this year,” she said. “A reversal of inflation will require a political shock – a concern that will remain in the market, but which cannot be impeded.”
In the meantime, Goodwin says duration is still not her sweet spot for risk.
“Market yields continue to rise even amid interest rate cuts of 100 basis points,” she noted. “This is highly unusual, both because a soft landing is highly unusual and because rising government spending and global bond yields are shifting the balance of supply and demand for US debt.”
She estimates that a reasonable range for the 10-year Treasury yield this year is a “wider-than-usual range” between 3.5% and 5.1% — “a range that likely does not reward aggressive interest rate positions.”
The 10-year bond yield has now risen more than a full percentage point since its close the day before the Fed’s first rate cut in mid-September, strategists at Bespoke Investment Group noted. At current levels, it is on the cusp of “very cheap” territory, using the company’s fair value model.
“Bond ETFs are oversold again, and in the near term, we would rather be long than short,” Besbock concluded.
Meanwhile, strategists at JPMorgan Chase & Co. said the Treasury yield curve has steepened too much relative to “fair value.”
“It appears to us that the curve has moved ahead of its fundamental drivers,” strategists including Guy Barry wrote. “As we look to the future, this disconnect presents risks that the curve could flatten again in the near term.”
However, Barry and his colleagues are reluctant to initiate a curve-flattening trade even when they see that the downward movement has become “extended.”
“We believe the Fed’s reaction function and structural shifts in demand for Treasuries support a steeper curve, so we are reluctant to swim upstream against this longer-term trend,” they wrote.
“So far, a lot of faces have been torn up by the latest bond market tantrum, and although we would like to say the worst is over, there is no sign that short positions have been exhausted or that the data supports the duration of the rally,” said Thomas Tzitzouris of Strategas. .
“That may change by Friday, with the jobs numbers coming out, and we have to assume there will be some profit taking on term shorts by tomorrow, with stock markets closing on Thursday. But for now, growth in the short base appears to be supported.” Initially with flotation growth.
Tzitouris also noted that this is not just bad news for Treasuries, but with companies trading at the tightest levels of the default risk adjusted cycle, we are entering a “risk zone” for both risk assets and safe havens.
The most prominent features of the company:
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Meta Platforms Inc. will terminate A third-party validation process on its social media platforms in the US, allowing users to comment on the accuracy of posts through a community feedback system that it said would promote freedom of expression.
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Uber Technologies Inc. said: It is collaborating with Nvidia to accelerate the development of self-driving technology.
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Johnson & Johnson said its combination treatment for lung cancer outperformed AstraZeneca Plc’s blockbuster treatment in a head-to-head study, a finding that could change the standard of care for one of the deadliest types of tumors.
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Toronto-Dominion Bank will consider the fate of its 10.1% stake in Charles Schwab as part of a strategic review stemming from the Canadian bank’s money-laundering scandal in the United States, new CEO Raymond Chun said.
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Getty Images Holdings Inc. agreed. to acquire Shutterstock Inc., a stock photography competitor, in a deal that would create a combined company worth about $3.7 billion including debt.
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Paychex Inc. agreed. on the acquisition of rival payroll processing company Paycor HCM Inc. For about $4.1 billion in cash, including debt.
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Apollo Global Management Inc. agreed. and BC Partners to acquire a controlling stake in the environmental services unit of GFL Environmental Inc., in a deal that values the business at C$8 billion (US$5.6 billion) including debt.
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Phillips 66 has agreed to acquire EPIC NGL, owner of natural gas liquids pipelines, for $2.2 billion in cash as it moves to expand its transportation business in the Permian Basin in the southwestern United States.
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Southwest Airlines will earn $92 million from the sale and leaseback of 35 Boeing 737-800 aircraft, the first step in the carrier’s broader plan to monetize a portion of its large fleet and extensive aircraft order book.
Main events this week:
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Eurozone producer price index, consumer confidence, Wednesday
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US ADP Employment, Fed Minutes, Consumer Credit, Wednesday
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The Fed’s Christopher Waller speaks on Wednesday
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China CPI, Producer Price Index, Thursday
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Retail sales in the euro zone, Thursday
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The US state funeral and National Day of Mourning for former President Jimmy Carter are a federal holiday on Thursday
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Japanese household spending, leading indicator, Friday
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US jobs report, consumer confidence, Friday
Some key movements in the markets:
Stocks
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The S&P 500 was down 1.1% as of 4pm New York time
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The Nasdaq 100 index fell 1.8%.
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The Dow Jones Industrial Average fell 0.4%
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MSCI World Index fell 0.8%
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The Bloomberg Magnificent 7 Total Return Index fell 2.5%.
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The Russell 2000 index fell 0.7%.
Currencies
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The Bloomberg Dollar Spot Index rose 0.2%.
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The euro fell 0.4 percent to $1.0344
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The British pound fell 0.3 percent to $1.2480
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The Japanese yen fell 0.2 percent to 157.93 yen to the dollar
Cryptocurrencies
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Bitcoin fell 5% to $96,530.7
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Ethereum fell 7.6% to $3,390.43
Bonds
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The yield on 10-year Treasury bonds rose 6 basis points to 4.69%.
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The yield on 10-year German bonds rose four basis points to 2.48%.
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The yield on British 10-year bonds rose seven basis points to 4.68%.
Goods
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West Texas Intermediate crude rose 1 percent to $74.28 a barrel
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Spot gold rose 0.5 percent to $2,650.33 per ounce
This story was produced with assistance from Bloomberg Automation.
–With assistance from Andre Janse van Vuuren, Julian Ponthus, and Aya Wagatsuma.
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