January 28, 2023

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Equities Volatile With Trade-offs Priced Into Fed Shift: Markets Wrap

Equities Volatile With Trade-offs Priced Into Fed Shift: Markets Wrap

(Bloomberg) — Stocks have faced a lot of volatility, as traders weigh mixed economic numbers amid bets that it won’t be enough to sway the Federal Reserve from lessening the pace of tightening next week as it recently signaled.

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The S&P 500 fluctuated as an unexpected drop in inflation expectations in the short term tempered concerns with a higher-than-expected producer price reading. The swaps continue to suggest that markets are betting that officials will raise interest rates by 50 basis points on Wednesday, after four consecutive hikes of 75 basis points.

“Keep in mind compared to where we were a year ago, we’re in a better position and heading in the right direction,” said Mike Lowengart of Morgan Stanley’s global investment office. “Today’s hotter-than-expected report is unlikely to be enough to prompt the Fed to commit to a 75 basis point hike next week, but any negative news on the inflation front is a thorn in the side of both the Fed and investors.”

On the eve of the Fed’s decision, all eyes will be on Tuesday’s consumer inflation numbers. US central bankers, including Chairman Jerome Powell, signaled a slowing pace of rate hikes while stressing that borrowing costs will need to continue to rise and remain constrained for some time to beat inflation.

A combination of factors, including persistent inflationary pressures and higher interest rates for longer, could mean that the widely anticipated economic recession in 2023 turns into a shallow but prolonged recession, according to strategists at Bloomberg Intelligence. A muted rebound in earnings amid rising lending rates could slow the S&P 500’s annual return to 5.7% in each of the next three years — half the speed of the 2010-2019 cycle.

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While many investors grew impatient with the Fed’s recent rate hike, history shows that they should be wary of doing so while inflation remains high, according to Bank of America Corp. strategists.

An analysis by Michael Hartnett and his team showed that stocks outperformed after the Fed stopped raising rates during periods of deinflation in the past 30 years. However, during the hyperinflationary era of the 1970s and 1980s, stocks slumped after a recent rally, they wrote in a note. In the current cycle, they expect the Fed to raise interest rates for the last time in March 2023.

The International Monetary Fund, the World Bank and others have raised concerns about the worsening global outlook, while hoping that reopening China will help support global growth. The Managing Director of the International Monetary Fund, Kristalina Georgieva, said that indications point to the possibility of further reductions in global growth. The foundation currently expects global growth to be 2.7% next year, slowing from 3.2% this year.

Some of the world’s biggest investors expect equities to see low double-digit gains next year, which could dampen relief after global equities suffered their worst loss since 2008.

Amid recent optimism that inflation has peaked — and that the Fed may soon begin to change its tone — 71% of respondents in a Bloomberg News poll expect stocks to rise, versus 19% expecting a decline. For those who did gain, the average response was 10%.

No borrowers were looking to sell new investment-grade US bonds on Friday, according to an informal survey of debt underwriters.

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The market was anxiously awaiting the PPI data, a key inflation reading, which came in higher than expected. It’s unclear if the company that stopped Wednesday and Thursday will return for another look next week, but it looks like there aren’t many other deals in the remainder of December.

Elsewhere, oil jumped after Russian President Vladimir Putin said Russia may cut production.

Some of the major movements in the markets:

Stores

  • The S&P 500 was little changed as of 11:11 a.m. New York time

  • The Nasdaq 100 rose 0.3%.

  • The Dow Jones Industrial Average changed little

  • Stoxx Europe 600 rose 0.7%

  • The MSCI World Index rose 0.3%.

currencies

  • The Bloomberg Spot Dollar Index has not changed

  • The euro fell 0.2 percent to $1.0537

  • The British pound rose 0.4 percent to $1.2288

  • The Japanese yen was little changed at 136.60 per dollar

Digital currencies

  • Bitcoin changed little at $17,174.48

  • Ether fell 0.2% to $1,275.69

bonds

  • The yield on the 10-year Treasury note advanced eight basis points to 3.56%.

  • The German 10-year bund yield advanced 11 basis points, to 1.93%.

  • The UK 10-year yield advanced nine basis points to 3.18%.

goods

  • West Texas Intermediate crude rose 0.8% to $72.04 a barrel

  • Gold futures rose 0.4 percent to $1,809.10 an ounce

This story was produced with help from Bloomberg Automation.

– With the help of Elena Bubina.

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