Stocks struggled to find direction as Jerome Powell refrained from giving any clues on the outlook for rates a day after two US officials signaled it’s too early to declare victory over inflation.
(Bloomberg) — Stocks struggled to find direction as Jerome Powell refrained from giving any clues on the outlook for rates a day after two US officials signaled it’s too early to declare victory over inflation.
The S&P 500 saw small moves near its key 3,900 mark, which is seen by several technical analysts as a resistance level that could help define a more solid direction. Treasury two-year yields, which are more sensitive to imminent Fed decisions, rose above 4.25%. The dollar wavered.
Powell didn’t directly comment on the monetary policy outlook at a forum in Stockholm Tuesday. He did say that “restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.” A pair of Fed officials said Monday the Fed may need to raise rates above 5% before pausing for some time.
“What the Fed is communicating has been the subject of extensive and exhaustive debate for much of the last year and they’re in a little bit of a tough spot,” said Olga Bitel, global strategist at William Blair. “The policy rates have broadly neutralized, so from here on out we will be moving into what I would consider a more restrictive monetary policy setting — which isn’t necessarily the Fed’s objective. At the same time, they’re very frustrated and concerned that the minute they take the foot off the gas pedal, the market will immediately move to loosen financial conditions.”
Some of the world’s largest asset managers such as BlackRock Inc. and Fidelity Investments are warning markets are underestimating both inflation and the ultimate peak of rates. Policymakers meet at the end of the month and are expected to either tighten by 50 basis points again or slow down to a quarter-point hike. Thursday’s consumer price index is forecast to show a deceleration to 6.5% in the year through December.
JPMorgan Chase & Co.’s chief Jamie Dimon said rate hikes might need to go beyond what’s currently expected, but he’s in favor of a pause to see the full impact of last year’s increases. There’s a 50% chance current expectations are correct in assuming the Fed will boost its benchmark to about 5%, and a 50% chance it will have to go to 6%, he said in an interview aired Tuesday on Fox Business.
Meantime, hedge fund billionaire Paul Tudor Jones likened Powell’s war against inflation to an attempt at a perfect moon landing, saying the Fed chair is facing the most-challenging economic environment in 40 years. If he succeeds, stocks could climb 7% to 8% this year, but if inflation worsens he’ll need to continue raising rates, increasing the risk of a downturn, he told CNBC.
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“We continue to believe that markets have moved too quickly to position for an inflection point in Fed policy, and that conditions are not yet in place for a sustained equity rally,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Bank of America Corp. clients sold $1.4 billion of US stocks in the biggest weekly outflow since November, the firm’s strategists including Jill Carey Hall wrote. All three client groups — hedge funds, retail and institutional investors — were net sellers.
In corporate news, Microsoft Corp. is in discussions to invest as much as $10 billion in OpenAI, the creator of viral artificial intelligence bot ChatGPT, according to people familiar with its plans. Coinbase Global Inc. is firing about 950 employees, or about 20% of its workforce, as the worsening crypto slump spurs another round of layoffs at the biggest US digital-asset exchange.
As the critical earnings season is due to begin on Friday, sentiment among analysts on the broader S&P 500 has soured to a point seen few times before.
Over the past three months, analysts’ net downgrades to profit estimates for S&P 500 stocks over the next two years have risen to 32% of total changes, data compiled by Goldman Sachs Group Inc. show. Outside of 2008 and the pandemic rout of 2020, that’s the most negative reading since Goldman started tracking the data in 1998.
Key events this week:
- ECB Governing Council members speak at Euromoney conference in Vienna, Wednesday
- US CPI, initial jobless claims, Thursday
- St Louis Fed President James Bullard at Wisconsin Bankers Association virtual event, Thursday
- Richmond Fed President Thomas Barkin speaks at VBA/VA Chamber, Thursday
- China trade, Friday
- US University of Michigan consumer sentiment, Friday
- Citigroup, JPMorgan Chase, Wells Fargo report earnings, Friday
This week’s MLIVE Pulse Survey:
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 11:36 a.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average was little changed
- The Stoxx Europe 600 fell 0.6%
- The MSCI World index fell 0.2%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.0737
- The British pound fell 0.2% to $1.2159
- The Japanese yen fell 0.3% to 132.24 per dollar
Cryptocurrencies
- Bitcoin rose 0.7% to $17,307.55
- Ether rose 0.9% to $1,330.15
Bonds
- The yield on 10-year Treasuries advanced 10 basis points to 3.63%
- Germany’s 10-year yield advanced eight basis points to 2.31%
- Britain’s 10-year yield advanced three basis points to 3.55%
Commodities
- West Texas Intermediate crude rose 0.6% to $75.09 a barrel
- Gold futures were little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Peyton Forte and Isabelle Lee.
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