Stock Markets Head for Monthly Drop With Rates Reexamined

The yield on two-year Treasuries rose more than 10 basis points for the month in Stock Markets. Bonds in Europe also fell after hot inflation data caused a reassessment of rate expectations, picking up a theme that has dominated trading in a month that saw the Federal Reserve signal its intention to ratchet rates higher than the market had been anticipating.

Investors in February grappled with realization that inflation isn’t cooling to the extent the Fed would like to see, especially as key indicators the central bank is watching came in hotter than expected. That subdued some of the optimism that had sent stocks Markets soaring in January.

Bond traders no longer view the odds of a Fed rate cut this year as better-than-even, a shift from what they were expecting just a month ago. Traders are now pricing US rates to peak at 5.4% this year, compared with about 5% just a month ago. Market expectations also see the European Central Bank raising rates through February 2024, with a 4% ECB terminal rate fully priced.

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“This whipsaw between narratives this year – Fed pause hopes being constructive for high beta assets, recession realities being the opposite – will continue,” Lauren Goodwin, economist and portfolio strategist at New York Life Investments, wrote in a note. “For this reason, and because the hurdle rate for keeping up with inflation is so high, we believe it’s important for investors to stay invested, leveraging resilient themes.”

Traders are also, once again, sifting through a bevy of economic data on Tuesday. US consumer confidence declined in February because of concerns about the outlook for jobs, incomes and business conditions. US home prices, meanwhile, fell for a sixth consecutive month.

“A lot of what the Fed is doing is working,” said Eric Diton, president and managing director of the Wealth Alliance, who noted layoffs at large companies and bankruptcies in small retail firms. “But it’s not a smooth ride. You’ll get blips — January was stronger data across the board and we’ll have to see what February and March look like. But I still think the overall trend is working — inflation is coming down, but it’s going to come down at this slower pace.”

Key events this week:

• China manufacturing PMI, non-manufacturing PMI, Caixin manufacturing PMI, Wednesday
• Eurozone S&P Global Eurozone Manufacturing PMI, Wednesday
• US construction spending, ISM Manufacturing, light vehicle sales, Wednesday
• Eurozone CPI, unemployment, Thursday
• US initial jobless claims, Thursday
• Eurozone S&P Global Eurozone Services PMI, PPI, Friday

Some of the main moves in Stock markets:

Stock Markets

• The S&P 500 fell 0.1% as of 3:29 p.m. New York time
• The Nasdaq 100 rose 0.1%
• The Dow Jones Industrial Average fell 0.6%
• The MSCI World index rose 0.4%

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Currencies

• The Bloomberg Dollar Spot Index rose 0.1%
• The euro fell 0.2% to $1.0583
• The British pound fell 0.1% to $1.2049
• The Japanese yen was little changed at 136.17 per dollar

Cryptocurrencies

• Bitcoin fell 0.4% to $23,280.39
• Ether was little changed at $1,628.2

Bonds

• The yield on 10-year Treasuries was little changed at 3.91%
• Germany’s 10-year yield advanced seven basis points to 2.65%
• Britain’s 10-year yield advanced two basis points to 3.83%

Commodities

• West Texas Intermediate crude rose 1.5% to $76.84 a barrel
• Gold futures rose 0.6% to $1,835.40 an ounce