Wall Street kicked off the week with a rally in stocks on speculation that the Federal Reserve will be able to slow its pace of rate hikes as inflation shows signs of cooling.
(Bloomberg) — Wall Street kicked off the week with a rally in stocks on speculation that the Federal Reserve will be able to slow its pace of rate hikes as inflation shows signs of cooling.
Whether or not that materializes any time soon, those bets helped send the S&P 500 above the 3,900 mark — a key level that could pave the way for more equity buyers, especially if Thursday’s consumer price index indicates further moderation. It’s no wonder that tech, one of the groups that have suffered the most during the Fed’s tightening, is driving the Nasdaq 100 up over 2%.
That risk-on push bolstered global assets as well, with the MSCI Emerging Markets Index set to enter a bull market after surging over 20% from its October low. Conversely, the dollar slumped against most of its major peers and headed toward its weakest since June.
The US CPI report will come out nearly a week after the latest jobs data showed that wage growth cooled in December. The figures will be among the last such readings policy makers will see before their Jan. 31-Feb. 1 meeting. Economists are penciling in a 25 basis-point increase in the Fed’s benchmark, though officials have indicated a half-point hike is possible.
“Wage gains have started to soften and that has given traders some hope that the Fed can relax its aggressive stance on inflation fighting in the months ahead,” said Dan Wantrobski, technical strategist at Janney Montgomery Scott.
Swap contracts showed investors now expect the Fed funds effective rate to peak below 5%, down from 5.06% after Friday’s US wage data.
If last week was any guide, two of the main market drivers in 2022 — inflation and the Fed’s response to it — will continue to exert their influence this year, according to Chris Larkin at E*Trade from Morgan Stanley.
“Any bullishness triggered by slowing inflation may be offset by stocks still-high valuations and overly optimistic earnings expectations,” said Larkin.
Morgan Stanley’s Michael Wilson said that while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are indeed still too high. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.
Elsewhere, oil rallied on hopes of renewed Chinese crude buying and as the dollar extended its decline. Brazilian assets — already being shunned by investors — retreated further on Monday amid fears of political instability in Latin America’s largest economy.
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Key events this week:
- US wholesale inventories, Tuesday
- Fed Chair Jerome Powell among speakers at Riksbank symposium in Stockholm, Tuesday
- World Bank expected to release global economic prospects report, Tuesday
- 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
Some of the main moves in markets:
Stocks
- The S&P 500 rose 1.3% as of 11:33 a.m. New York time
- The Nasdaq 100 rose 2.2%
- The Dow Jones Industrial Average rose 0.7%
- The Stoxx Europe 600 rose 1%
- The MSCI World index rose 1.6%
Currencies
- The Bloomberg Dollar Spot Index fell 0.7%
- The euro rose 1% to $1.0746
- The British pound rose 0.9% to $1.2197
- The Japanese yen rose 0.3% to 131.73 per dollar
Cryptocurrencies
- Bitcoin rose 2.2% to $17,323.97
- Ether rose 5.7% to $1,341.44
Bonds
- The yield on 10-year Treasuries declined four basis points to 3.52%
- Germany’s 10-year yield advanced one basis point to 2.22%
- Britain’s 10-year yield advanced five basis points to 3.53%
Commodities
- West Texas Intermediate crude rose 1.7% to $75.05 a barrel
- Gold futures rose 0.6% to $1,880.30 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Vildana Hajric and Isabelle Lee.
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