Treasuries Hit As Hawkish Fed Views Keep Piling Up: Markets Wrap

(Bloomberg) -- The world's biggest bond market extended this month's selloff after solid economic readings and hawkish Fedspeak reinforced speculation that interest rates will remain higher for longer.

Treasuries fell across the US curve — with two-year yields once again near the 5% mark. The S&P 500 dropped for a fifth straight session — its longest losing run since October. The dollar rose. An initial quarter-point Federal Reserve rate cut remained priced in for November.

When asked about the possibility of hiking, Fed Bank of New York President John Williams said that while it is “not” his baseline expectation, it's possible — if warranted. His Atlanta counterpart Raphael Bostic noted he doesn't think it will be appropriate to ease until toward the end of 2024. The Fed could “potentially” hold rates steady all year, Minneapolis Fed chief Neel Kashkari told Fox News Channel.

Market-implied expectations for Fed rate cuts waned further this week after Chair Jerome Powell signaled policymakers will wait longer than previously anticipated to ease policy. Traders now see just one to two rate cuts this year. That's a far cry from the roughly six they expected at the start of 2024, and the three that Fed officials penciled in just a month ago.

“The Fed rhetoric was skewed hawkishly,” said Ian Lyngen and Vail Hartman at BMO Capital Markets. “The data lineup and updates from an array of talking Feds left the market with the impression that Powell's assessment on Tuesday is the party line — therefore ‘wait and see' to ‘wait and see'.”

Treasury 10-year yields rose five basis points to 4.63%. The S&P 500 fell to around 5,010, with its most influential group — technology — leading declines. Netflix Inc. posted its best start to the year since 2020, attracting more new customers than anyone expected thanks to a strong slate of original programs and a crackdown on password sharing.

Read: TIPS Auction Stops Through at Decade's Second-Highest Yield

“Fedspeak is making us increasingly nervous,” said Andrew Brenner at NatAlliance Securities. He added that if the two-year US yield breaks 5%, the next level to watch would be 5.2%.

In economic data, jobless claims remained subdued, consistent with a healthy job market. Separately, the Philadelphia Fed factory index topped estimates. While existing-home sales fell, the pace was roughly in line with the median forecast of economists.

“Most of the data this week show the economy is still firing on all cylinders,” said Chris Larkin at E*Trade from Morgan Stanley. “That's going to be a challenge for the Fed's rate-cutting plans.”

Read: Less Dovish Fed Comes Into Line With Market

The Fed may not cut interest rates at all this year with inflation remaining high, said JPMorgan Chase & Co. President Daniel Pinto.

“It may take a bit longer until they can cut rates,” Pinto said at a Semafor event in Washington, adding that the likelihood of a rate hike is “very, very low” amid widespread skepticism that inflation will ease any time soon. The Fed isn't in any hurry, as a rate cut that comes too early would be “painful” and probably cause a recession, he said.

The market's biggest worry right now is inflation, which is re-accelerating and throwing cold water on the idea of any rate cuts in 2024, let alone one or two, according to Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management.

“We are firmly in the camp of no rate cuts in 2024,” he said. “We believe investors should prepare for a higher for longer regime when it comes to both inflation and interest rates and that investment portfolios should be positioned for these dynamics for the foreseeable future.”

“With rate cuts delayed, rather than canceled, in our view, we still expect the yield on the 10-year US Treasury to end the year around 3.85%, said Mark Haefele at UBS Global Wealth Management. “Once the Fed begins cutting rates this year, the bond market will likely continue to price a sequence of further cuts into 2025 and beyond.”

While timing the market is hard, investors can more confidently add duration exposure, according to Bank of America Corp. strategists led by Mark Cabana, who recommend “going long” five-year Treasuries.

The trade is supported by “Fed unlikely to hike, risk asset sensitivity to rates and cleaner duration positioning,” they noted.

Corporate Highlights:

• Alphabet Inc. Chief Executive Officer Sundar Pichai announced changes to Google's workplace teams structure, saying the moves will help the company develop artificial intelligence products and services faster and more efficiently.
• Micron Technology Inc., the largest US maker of computer-memory chips, is poised to get $6.1 billion in grants from the Commerce Department to help pay for domestic factory projects, part of an effort to bring semiconductor production back to American soil.
• D.R. Horton Inc. increased sales expectations for its full fiscal year as the US housing market heads into its key spring selling season.
• Alaska Air Group Inc. expects second-quarter profits will top analyst estimates, signaling that the carrier is recovering from a near-catastrophe on one of its planes that triggered the temporary grounding of a key Boeing Co. aircraft model.
• Las Vegas Sands Corp. said remodeling at an entertainment center and a hotel in Macau will crimp results this year.
• EBay Inc.'s embrace of artificial intelligence has turned the stock's most bearish analyst into its biggest fan, with Morgan Stanley seeing a further 25% gain for the shares over the next year.
• DNA testing firm 23andMe Holding Co.'s Chief Executive Officer Anne Wojcicki said she's considering taking the struggling company private, less than three years after it began selling shares.
• Blackstone Inc. collected more fees from big retail funds and credit strategies during the first quarter, compensating for the slower pace of deal exits.
• L'Oréal SA reported better-than-expected first-quarter sales as strength in Europe and North America helped offset a slowdown in shopping by Chinese travelers.

Key events this week:

• Japan CPI, Friday
• BOE Deputy Governor Dave Ramsden and ECB Governing Council member Joachim Nagel speak, Friday
• Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2% as of 4 p.m. New York time
• The Nasdaq 100 fell 0.6%
• The Dow Jones Industrial Average was little changed
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%
• The euro fell 0.3% to $1.0644
• The British pound fell 0.1% to $1.2437
• The Japanese yen fell 0.1% to 154.62 per dollar

Cryptocurrencies

• Bitcoin rose 4.4% to $63,518.01
• Ether rose 3.1% to $3,065.7

Bonds

• The yield on 10-year Treasuries advanced five basis points to 4.63%
• Germany's 10-year yield advanced three basis points to 2.50%
• Britain's 10-year yield advanced one basis point to 4.27%

Commodities

• West Texas Intermediate crude was little changed
• Spot gold rose 0.8% to $2,380.08 an ounce

This story was produced with the assistance of Bloomberg Automation.

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