Wall Street Rekindles Risk-On ‘Goldilocks’ Trade: Markets Wrap

(Source: Freepik)

(Bloomberg) -- Wall Street shook off worries over the Bank of Japan policy tweak as another round of US data bolstered bets on the so-called Goldilocks scenario of an economy that's neither running too hot nor too cold.

The stock market powered ahead as key gauges of inflation showed further easing while Americans grew more optimistic about the economic outlook. When taken together with recent figures showing the US has remained fairly resilient despite aggressive rate hikes, the reports fueled speculation the Federal Reserve will be able to avoid a recession.

It's a week “chock full of economic data that all points to a higher probability of a soft landing,” said Gina Bolvin, president of Bolvin Wealth Management Group. “This could be the catalyst to send the market to new highs.”

Most major groups in the S&P 500 rose Friday, with the equity benchmark set for its third straight week of gains. The Nasdaq 100 climbed about 2%. Meta Platforms Inc. and Tesla Inc. gained at least 3.5%, while Intel Corp. rallied 6% on a bullish sales forecast. Bond yields fell alongside the dollar.

Recession Talk Fades

Tech firms in the US are talking less about recession and more about artificial intelligence this earnings season — signaling that companies are increasingly optimistic about a soft economic landing.

Nearly half of the Nasdaq 100 firms having reported, and executives are less frequently using words like “headwinds”, “inflation”, and “recession” in calls with investors, according to a Bloomberg analysis. That marks a sharp reversal from last year, when such concerns drove steep equity declines.

With the macro environment being quite powerful right now, investors are buying the notion that the Fed has been able to bring inflation down without a recession, according to David Donabedian, chief investment officer of CIBC Private Wealth US.

“The market has had a trifecta of good news over the last few weeks,” Donabedian said. “Inflation is coming down, the economy is holding steady, and earnings thus far are coming in ahead of expectations. This is fueling a strong market environment and the rally continues.”

BOJ Tweak

In what looked like a “sell the rumor, buy the news” episode, US markets saw a reversal from Thursday, when anxiety was running high before the BOJ decision. Governor Kazuo Ueda announced Friday the central bank would allow yields to rise above a ceiling it now calls a point of reference. That paves the way for a future normalization of policy that has implications for a wide range of global assets and markets heavily exposed to Japanese money.

Yields on 10-year Japanese government bonds jumped to their highest since 2014 as investors speculated whether this tweak was a precursor to more drastic changes for Japan's ultra-easy monetary policy.

Any significant adjustment to the YCC policy would have implications for the Treasury market given that Japan households are one of the largest buyers of US debt, according to Dennis DeBusschere founder of 22V Research. The rationale is: if yields in Japan become more attractive, there could be selling of US government bonds to buy the Asian nation's debt.

“But the actual YCC change was not as dramatic as feared,” he noted.

In corporate news, US regional lenders were set for the longest weekly streak of gains since March 2021, bolstered by a merger deal for PacWest Bancorp. Procter & Gamble Co. rallied as the maker of Gillette razors reported earnings that beat estimates. Ford Motor Co. slipped as it expects to see losses from electric vehicles hit $4.5 billion this year. Exxon Mobil Corp. retreated as it fell short of analysts' expectations with a third straight drop in profit.