Finance

Stocks sink as economic jitters fuel rush to bonds: Markets join in

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2 weeks ago

August 1, 2024

Stocks sink as economic jitters fuel rush to bonds: Markets join in

(Bloomberg) — Stocks were hit as bonds rose after weak economic data raised concerns that the Federal Reserve is waiting too long to cut rates.

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Ten-year government bond yields fell below 4%, with swap traders now fully pricing in three rate cuts this year. Ahead of the US jobs report, data showed that unemployment rates hit their highest point in almost a year and industrial activity shrank the most in eight months. While policy easing bodes well for corporate America, economic turmoil sent stock prices lower.

Jerome Powell indicated Wednesday that officials are on track to cut rates in September unless inflation progress stalls – citing the risk of a further weakening in employment. The monthly employment figures due out on Friday are likely to fuel the debate. Unemployment is now close to triggering a recession indicator developed by former Fed economist Claudia Sahm, which has a perfect track record over the past half century: the “Sahm rule.”

For Neil Dutta of Renaissance Macro Research, the “continued deterioration” in economic data has become apparent and “until the Fed starts cutting spending, they will be looking behind the curve.”

“The labor market has been sending out warning signals in recent months,” said Chris Senyek of Wolfe Research. “History shows that Powell walks a very fine line when it comes to potentially waiting too long to cut rates before it is too late.”

The S&P 500 fell 1.5%. The Nasdaq 100 fell 2.5%. The Russell 2000 of small caps fell 3.5%. Chipmaker Qualcomm Inc. slumped on concerns that the phone market is recovering more slowly than investors had hoped. Meta Platforms Inc. jumped on an increase in sales. Apple Inc.’s revenues and Amazon.com Inc. will be announced after the closing bell.

The ten-year government bond yield fell by five basis points to 3.98%. The pound fell after the Bank of England cut interest rates, signaling further cautious cuts.

“There is one scenario where a rate cut would be viewed negatively for stocks, and that is if the rate cut is accompanied by the Federal Reserve expressing concerns about the economy,” said George Ball of Sanders Morris. “While that is not a likely scenario, it is not entirely implausible either.”

At Capital Economics, Thomas Ryan says a further decline in output raises the risk that US growth will lose momentum in the third quarter – and that the decline in the employment index will increase concerns that the ‘Fed has left it too late to relax policy. ”

“The only thing that would cause the Fed to make more dramatic cuts is if there were a material deterioration in the labor market, something we are watching closely,” said Chris Zaccarelli of Independent Advisor Alliance.

Powell was asked about the “Sahm rule” on Wednesday after he and his colleagues decided to leave their benchmark interest rate unchanged at the highest level in more than two decades. He said policymakers “think we are seeing a normalizing labor market,” but if “this starts to show signs of it being more than that, then we are well positioned to respond.”

According to Oscar Munoz and Gennadiy, the Fed has made it clear that more evidence of soft inflationary pressures is needed, but a slowdown in the labor market could lead the Fed to cut rates more aggressively, leading to a rate cut in November in addition to September and December the game comes. Goldberg at TD Securities.

“Interest rates have fallen sharply in recent days due to a combination of a more dovish Fed, dovish data and geopolitical risks,” they said. “As such, weaker yields could amplify the decline in yields, further exacerbating the upward trend.”

Fixed income ETFs raked in a historic amount of cash last month as investors poured into the bond market and positioned themselves for the start of a Fed rate-cutting cycle. Bond funds saw inflows of roughly $39 billion in July, the highest on record, according to data from Strategas.

According to Vail Hartman of BMO Capital Markets, the data will be less relevant to expectations about the timing of the first rate cut than to the perceived likelihood that the Fed will eventually have to deviate from the 25 basis point fine tuning. quarterly cuts, as implied by the projections.

“Put another way, the wage numbers won’t cause the market to seriously reconsider whether a September rate cut is too early – but the information could easily shift the market-implied policy rate path toward a more dramatic cutting campaign ” said Hartman.

Indeed, the Fed is a hot topic this week for global investors trying to time rate cuts. It is also, unusually, a prominent part of Corporate America’s post-earnings conference calls.

According to a Bloomberg analysis of transcripts from S&P 500 and Stoxx 600 companies, the words “Federal Reserve” were on track to be mentioned about 380 times during calls with analysts in the second quarter. That would be the highest number ever recorded in the database, going back to 2001, if the current pace continues.

A contrarian stock indicator from Bank of America Corp. rose last month, reflecting increased sentiment on Wall Street. Although the indicator is still in ‘neutral’ territory and not at outright ‘buy’ or ‘sell’ thresholds, the extremely bearish attitude towards stocks is no longer a support for upside potential, as it was last year .

As risk momentum in US equities showed signs of easing in July, several computer-based systematic strategy funds reduced their equity exposure. But maybe they’re not done selling yet.

Commodity trading advisors, or CTAs, cut their stock positions to a two-month low in July, according to Bank of America Corp. These funds typically use a combination of price trend signals and volatility to determine allocation. When the stock market’s rally ran into trouble, CTAs also unwound their positions.

But according to Chintan Kotecha, senior equity derivatives research analyst at BofA Securities, CTAs who remain long U.S. stocks should continue to cut their positions, at least in the short term, as the rally shows signs of stalling.

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