Stocks and Bonds Retreat as US Business Activity Accelerates and Inflation Picks Up
The US stock market took a hit as both stocks and bonds retreated following data that showed an acceleration in US business activity and a pickup in inflation. This reinforced expectations that the Federal Reserve will maintain its current interest rate policy.
The S&P 500 fell below 5,300, with all megacap stocks down except for Nvidia Corp, which saw a significant jump of over 9% on a positive outlook, surpassing the historic $1,000 mark. The Dow Jones Industrial Average also experienced a 1.5% decline, led by a sharp drop in Boeing Co. due to continued cash burn projections for the quarter and the full year. Treasury yields rose, particularly in shorter maturities.
Market participants are now fully pricing in a quarter-point rate cut by the Fed in December, compared to November. The growth in activity among service providers was the fastest in a year, while manufacturing output expanded at a quicker pace. This resilience in economic activity is making it challenging for inflation to cool down, which is why the Fed is expected to keep rates higher for a longer period.
Despite the uncertainty surrounding inflation, the US economy remains robust, allowing the Fed to maintain its current stance on interest rates. Analysts like Don Rissmiller at Strategas Securities are predicting the first Fed rate cut to occur in September.
In response to the market movements, Treasury two-year yields climbed seven basis points to 4.94%, while the dollar saw a slight increase. Bitcoin experienced a 4% decline, while oil and gold prices also retreated.
The recent release of Fed minutes revealed that policymakers are leaning towards keeping rates higher for an extended period to combat inflation. However, they are not ruling out rate hikes if inflation does not behave as expected.
Despite the market volatility, some analysts, like JPMorgan Chase & Co.’s trading desk, believe that the S&P 500 still has room to rise, especially with strong earnings reports from companies like Nvidia and the steady growth of the economy.
Key events to watch this week include Japan’s CPI data, Canada’s retail sales figures, Germany’s GDP report, and various economic indicators from the US. Fed’s Christopher Waller is also scheduled to speak on Friday.
Overall, the market remains volatile as investors navigate through economic data and Fed policy expectations.