(Bloomberg) — Stocks were hammered as a selloff in the world's largest bond market deepened on speculation that the Federal Reserve will not cut interest rates before July amid inflation risks.
Following a recent rally, equities lost traction on Tuesday as a report on US service providers showed a price gauge hitting the highest since early 2023. Sell-offs in major technology weighed heavily on Wall Street trading, with the S&P 500 down over 1% and the Nasdaq 100 falling almost twice as much. Nvidia Corp. sank. 6.2%. Treasuries fell across the curve, with a $39 billion sale of 10-year bonds attracting the highest yield since 2007. The market also came under pressure amid a flurry of investment-grade deals.
“Rising yields are not necessarily a problem for stocks unless, of course, the economy starts to fail. Then all bets are off,” Kenny Polcari told SlateStone Wealth. “But an increase in yield will be a problem if inflation rears its ugly head.”
For Mark Streiber at FHN Financial, the latest US services report supports the Fed's recent communication that rate cuts would likely slow in 2025 due to downside price risks. Fed Bank of Atlanta President Raphael Bostic said officials should be cautious given uneven progress on reducing inflation.
“It is likely that the Fed will switch from cutting interest rates at every decision, as they did between September and December, to delaying rate cuts in 2025,” Bill Adams told Comerica Bank.
Separate data on Tuesday showed job openings rose to a six-month high in November, boosted by a jump in business services – while other industries showed more mixed demand for workers.
The S&P 500 fell briefly below 5,900. The Nasdaq 100 slipped 1.8%. The Dow Jones Industrial Average fell 0.4%. A gauge of the “Magnificent Seven” megacaps sank 2.5%. The Russell 2000 index of smaller companies fell 0.7%.
The yield on 10-year Treasuries climbed six basis points to 4.69%. In the UK, 30-year yields have reached their highest since 1998, raising the possibility of tax rises to meet fiscal rules. Bitcoin dropped below $100,000.
With Treasury yields rising again, Bank of America Corp. strategists predicts that traders may return to finding strong economic data negative, as it is a sign that the Fed will need to keep rates high for longer.
Growth scares are subsiding as inflation and rates become a bigger focus, said the team led by Ohsung Kwon.
Exchange traders who as recently as late September were fully pricing in another Fed rate cut by March had gotten rid of wages, there will be one until the second half of the year.
Another sign of concern in the bond market can be seen in a metric called the term premium, which is the extra yield investors demand to hold long-dated debt instead of rolling over shorter-term securities as they mature . It recently reached the highest level since 2015.
Equity investors will also suffer if Treasury yields remain high and companies have to face persistently high borrowing costs, according to Apollo Global Management's Torsten Slok.
For Lauren Goodwin at New York Life Investments, because growth expectations are flawed, unless we see a shock to employment or inflation, investors should give the market the benefit of the doubt.
“Our base case from a US economic perspective is a constructive one – that US activity will come in close to its long-term trend of 2% for the year – but that still calls for a moderate slowdown in during this year,” he said. “A reversal in inflation will require a policy shock – a concern that will linger over the market, but cannot be discounted.”
Meanwhile, Goodwin says length is still not his favorite place to take a risk.
“Market yields continue to edge even higher amid 100 basis points of policy rate cuts,” he noted. “This is very unusual, because soft landings are very unusual and because higher government spending and global bond yields are changing the supply-demand balance for US debt.”
She estimates that the reasonable range for the 10-year Treasury yield this year is a “wider than usual range” between 3.5% and 5.1% – “and one that is unlikely to reward a bold position in interest rates,” she added. to the conclusion.
The 10-year yield is now up more than one full percentage point since it closed on the day before the Fed's first rate cut in mid-September, strategists at Bespoke Investment Group noted. At around current levels, it is right on the cusp of “extremely cheap” territory, using the company's fair value model.
“Bond ETFs have become very overvalued once again, and in the near term, we'd rather be long than short,” Bespoke concluded.
Meanwhile, JPMorgan Chase & Co. strategists said. that the Treasury yield curve has become steeper relative to “fair value.”
“It appears to us that the curve has shifted ahead of its fundamental drivers,” wrote strategists including Jay Barry. “As we look forward, this decoupling presents risks that the curve could flatten back in the near term.”
Barry and his colleagues, however, are reluctant to initiate a curve-flattening trade even if they see the uptrend becoming “extended.”
“We think the Fed's response function and the structural changes in demand for Treasuries support a steeper curve, so we are hesitant to swim upstream against this long-term trend,” they wrote .
“By now, plenty of faces have been ripped off by this latest bond market tantrum, and while we'd love to say the worst is over, there's no sign that shorts have run out or the data is supportive to length. rally,” said Thomas Tzitzouris at Strategas.
“That could change by Friday, with the jobs volume, and we have to assume that there will be some profit on shorts by tomorrow, with equity markets closing on Thursday. But for now, the growth in the short base appears to be tentatively supported by float growth,” he said.
Tzitzouris also noted that this is not just bad news for Treasuries, but with corporates trading at their tightest levels of the default risk adjusted cycle, we are entering a “danger zone” on for risk assets and safe havens.
Corporate Highlights:
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Meta Platforms Inc. will is ending third-party fact-checking on its social media platforms in the US, letting users comment on the accuracy of posts with a community notes system it said will promote free expression.
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Uber Technologies Inc. said. that it is teaming up with Nvidia to accelerate the development of autonomous driving technology.
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Johnson & Johnson said its combination therapy for lung cancer outperformed AstraZeneca Plc's blockbuster Tagrisso in a head-to-head study, a finding that could change the standard of care for one of the deadliest types of tumor.
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Toronto-Dominion Bank will consider the fate of its 10.1% stake in Charles Schwab Corp. as part of a strategic review stemming from the Canadian bank money laundering scandal in the United States, said new CEO Raymond Chun.
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Getty Images Holdings Inc. agreed. to acquire rival stock photo provider Shutterstock Inc. in a deal that would create a combined company worth about $3.7 billion including debt.
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Paychex Inc. agreed to acquire rival payroll processor Paycor HCM Inc. for about $4.1 billion in cash, including debt.
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Apollo Global Management Inc. agreed. and BC Partners to acquire a controlling stake in environmental services unit GFL Environmental Inc., in a deal that values the business at C$8 billion ($5.6 billion) including debt.
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Phillips 66 agreed to acquire EPIC NGL, the owner of natural gas liquids pipelines, for $2.2 billion in cash as it moves to expand its transportation business in the Permian basin in the US southwest.
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Southwest Airlines Co. will earn $92 million from the sale and leaseback of 35 of its Boeing Co. planes. 737-800 back, the first step in the carrier's wider plan to monetize its large fleet and extensive aircraft order book.
Key events this week:
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Eurozone PPI, consumer confidence, Wednesday
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US ADP employment, fed records, consumer credit, Wednesday
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Fed's Christopher Waller speaking, on Wednesday
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China CPI, PPI, Thursday
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Eurozone retail sales, Thursday
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The US state funeral and national day of mourning for former President Jimmy Carter is a federal holiday, Thursday
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Japanese household spending, a leading index, Friday
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US jobs report, consumer sentiment, Friday
Some of the main movements in markets:
Stocks
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The S&P 500 fell 1.1% as of 4 pm New York time
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The Nasdaq 100 fell 1.8%
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Dow Jones Industrial Average fell 0.4%
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MSCI World Index fell 0.8%
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Bloomberg Magnificent 7 Total Return Index fell 2.5%
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Russell 2000 Index fell 0.7%
Currency
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The Bloomberg Dollar Spot Index rose 0.2%
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The euro fell 0.4% to $1.0344
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The British pound fell 0.3% to $1.2480
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The Japanese yen fell 0.2% to 157.93 per dollar
Crypto currency
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Bitcoin fell 5% to $96,530.7
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Ether fell 7.6% to $3,390.43
Bonds
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The yield on 10-year Treasuries increased six basis points to 4.69%
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Germany's 10-year yield rose four basis points to 2.48%
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Britain's 10-year yield rose seven basis points to 4.68%
Goods
This story was produced with the help of Bloomberg Automation.
–With help from Andre Janse van Vuuren, Julien Ponthus and Aya Wagatsuma.
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