(Bloomberg) — The world’s biggest bond market kicked off the week on the back foot as geopolitical pressures abated and traders positioned for this week’s key inflation data.
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Treasuries fell across the curve, with 10-year yields hitting the highest levels since November and coming within a striking distance of the 4.5% level that some investors are watching as a threshold that could determine whether rates will revisit last year’s highs. Traders’ conviction on three quarter-point rate cuts from the Federal Reserve this year is quickly dissipating, with markets now favoring just two reductions.
Economists forecast the consumer price index Wednesday will show some easing of inflation pressures, but the core gauge would still be up around 3.7% from a year earlier — which is above the Fed’s 2% target.
“After Monday’s solar eclipse, US core inflation will determine if the shadow that markets increasingly price over a June rate cut will grow larger or pass by,” said Morgan Stanley strategists including Matthew Hornbach.
US 10-year yields rose two basis points to 4.42%. The S&P 500 hovered near 5,200. Energy shares joined losses in oil as Israel said it would remove some troops from Gaza. Megacaps were mixed, with Nvidia Corp. down and Tesla Inc. up 4%. Bitcoin topped $71,000.
“This week’s CPI update will offer investors a key piece to the policy puzzle though we’re doubtful the information will be sufficient to convincingly resolve the ongoing debate around the timing of rate cuts in 2024,” said Ian Lyngen and Vail Hartman at BMO Capital Markets.
Economists at JPMorgan Chase & Co. pushed back their forecast for the first Fed rate cut of the cycle after a strong March jobs report. They now expect the US central bank to start easing its monetary policy in July instead of June.
“The easing in wage inflation alongside solid job growth is a testament to the supply-side improvement in the labor market,” JPMorgan’s chief US economist Michael Feroli wrote.
Swap contracts imply around 60 basis points of US monetary easing this year, which means two cuts is the most likely outcome with the first expected by September, according to Bloomberg pricing. On Friday, the chance of a third cut was still above 50%.
A rise in bond yields might be driven by “the wrong reasons” and will put stocks under pressure, according to JPMorgan Chase & Co. strategists led by Mislav Matejka.
The team expects US 10-year yields to drop amid elevated geopolitical risks, while noting the risk of inflation staying too hot. Given the potential for inflation overshoot, stocks with high financing costs could stay under pressure, the strategists wrote.
The rally in stock markets is likely to pause going into the earnings season as buybacks taper out through blackout periods and equity inflows turn flat due to seasonality, according to Deutsche Bank AG strategists led by Parag Thatte and Binky Chadha.
Wall Street is expecting a subdued earnings season from Corporate America despite the first-quarter’s stock market fireworks.
Strategists predict that S&P 500 companies will post their smallest year-over-year profit growth since 2019, just 3.9%, in the first quarter, according to data compiled by Bloomberg Intelligence. But in this case the market may be onto something, because those forecasts could very well turn out to be overly gloomy — like they were in the fourth quarter, when expectations were for around 1% growth and the actual results turned out to be over 8%.
“The recent resiliency of inflation reduces the immediacy of rate cuts, which puts more pressure on earnings to drive future market gains,” said Richard Saperstein at Treasury Partners. “Given the elevated market multiples and rising bond yields, we remain cautious on stocks until earnings season delivers clear evidence of earnings growth.”
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Read More: Bond Yields Hit 2024 Highs With Inflation in Focus: Markets Wrap