Treasuries rise ahead of PCE on Nike’s late-night success: Markets closed

(Bloomberg) — The world’s largest bond market rose after the latest batch of economic reports reinforced speculation that the Federal Reserve will be able to cut interest rates this year to prevent a deeper U.S. slowdown.

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Investors bracing for the Fed’s preferred inflation gauge piled into Treasuries as multiple data points illustrated a slowdown in growth linked to the central bank’s longer bull stance. The government reduced personal spending to 1.5% annualized in the first quarter. Separate releases showed declines in orders and shipments of certain business equipment, weakness in the job market and a drop in home purchases.

For Chris Low of FHN Financial, the slowdown story has gotten stronger.

“Continuing claims have increased and are now the highest since late 2021 – sending a warning signal that the job market may be slowing,” said Jeff Roach of LPL Financial. “We expect consumer and business activity to slow in the second half of 2024, giving the Fed ample opportunity to begin cutting rates later this year.”

The 10-year Treasury yield fell four basis points to 4.29%. The S&P 500 hovered around 5,480. In late trading, Nike Inc. tumbled as sales missed estimates. Walgreens Boots Alliance Inc. fell 22% in regular hours after cutting its guidance. and Petco Health and Wellness Co., as Keith Gill — known as “Roaring Kitty” — posted a cartoon image of a dog on the X.

Traders are pricing in roughly “one point of volatility” of premium added on Friday, the session after Joe Biden and Donald Trump debated, according to a Citigroup Inc. analysis that compared current and expected volatility. That assumes the effect of end-of-quarter options expiration, another potential catalyst that could rock stocks, will be similar to that of last week’s triple-witching.

US PREVIEW: May PCE Inflation Will Offer Welcome News for Fed

Atlanta Fed Bank President Raphael Bostic said he continues to expect a rate cut this year amid signs that inflation has resumed its decline. His projection echoes that of the Federal Open Market Committee. Earlier this month, Fed officials predicted only a rate cut in 2024, in line with the median forecast.

Swap markets are pricing in around 45 basis points of easing in 2024, which would amount to less than two cuts.

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Economists expect Friday’s data to show the Fed’s preferred gauge of underlying inflation slowed to an annualized rate of 2.6% last month from 2.8%. While that’s the lowest reading since March 2021, it remains above the Fed’s 2% inflation target.

“A consensus measure would conform to the narrative that the reflationary pressures of early 2024 are fading and the cooling trend seen during the second half of 2023 has again resumed in the second quarter,” said BMO’s Ian Lyngen and Vail Hartman. Capital Markets. . “Perhaps more importantly, investors are anticipating a round of inflation data that offers incremental support for a rate cut in September.”

A series of weaker-than-estimated data points pushed the U.S. version of Citigroup’s Economic Surprise Index to its lowest level since August 2022. The indicator measures the gap between actual releases and analysts’ expectations.

Concerns about the strength of the job market and the subsequent effect on consumer spending — plus the market’s reliance on just a few stocks — have caused consternation and warnings that the bull market needs rest, recalibration and perhaps help from the Fed, from according to Quincy Krosby of LPL Financial.

If Friday’s PCE data disappoints, headlines about stagflation will hit the tape, Krosby noted. But if estimates hold or surprise with cooler data, that should help the market heading into July.

“Still, an overbought and relatively expensive market based on just a handful of mega names may need to recalibrate and allow other sectors to coexist with them or even start leading the market,” she said. “Such adjustments could trigger pockets of volatility alongside attractive pockets of opportunity.”

Ed Clissold of Ned Davis Research says persistent pessimism about the economy and stocks has been a key driver of the bull market. And much of the pessimism has given way to optimism or neutral views.

“The change in sentiment puts more onus on fundamentals for the bull market to continue,” he said. “Our conclusion is that the stock market can no longer depend on the economy beating low expectations. Fundamentals will need to drive the bull market in the second half.”

For now, Clissold remains bullish on stocks — both in absolute terms and relative to bonds and cash.

For Chris Senyek of Wolfe Research, volatility will likely continue to increase, and this will generally benefit the “Magnificent Seven” megacaps and overall trading momentum in the coming weeks.

“More specifically, we expect these themes to continue to benefit from the environment where growth is slowing — but the Fed is expected to begin a deep cutting cycle,” he noted. “Additionally, our sense is that the biggest companies driving these trends will once again deliver very solid results during the second quarter earnings season.”

A survey by 22V Research showed that investors largely expect artificial intelligence companies to beat second-quarter earnings estimates.

About 59% of investors surveyed think AI gains will “exceed” expectations and 36% believe they will “catch up.” Only 5% think they will “lose” the predictions.

Despite believing these companies will exceed expectations, investors surveyed are unsure about how stocks of AI companies will react, 22V said.

In a month when Nvidia Corp. briefly became the world’s largest company amid optimism about AI, hedge funds were “aggressively” shorting technology stocks, according to analysis from Goldman Sachs Group Inc.

This month’s net selling in the U.S. technology sector is on track to be the biggest on record since 2017, according to Goldman prime brokerage data. The hedge fund cutbacks are in sharp contrast to the record flows seen into technology-related funds last week.

Corporate highlights:

• Boeing Co.’s decision to change its offer for Spirit AeroSystems Holdings Inc. to a mostly stock deal is likely an effort to preserve cash and avoid ratings downgrades as the planemaker teeters on the brink of junk status, according to credit analysts.

• Shares of Webtoon Entertainment Inc. rose 9.5% on the online comics company’s debut, following a U.S. initial public offering that raised $315 million, priced at the upper end of a marketed range.

• Jeans maker Levi Strauss & Co. reported quarterly sales that came in slightly below estimates, underscoring Wall Street’s high expectations for the company.

• International Paper Co. tumbled after Suzano SA said it would end its pursuit of the U.S. paper giant.

• Customers of major U.S. telecommunications companies including AT&T Inc., T Mobile US Inc. and Verizon Communications Inc. are reporting problems connecting to their networks while they are out of the country.

• Target Corp. is lowering standards to deter shoplifters, taking a tougher approach to further curb the thefts that weigh on its operations.

• L’Oreal SA expects slower growth for the overall beauty market this year, according to its CEO, as weakness in China weighs on sales after years of rapid gains.

Main events this week:

• Japan Tokyo CPI, unemployment, industrial production, Friday

• US PCE Inflation, Spending and Income, Consumer Sentiment from the University of Michigan, Friday

• Fed’s Thomas Barkin Speaks on Friday

Some of the main movements in the markets:

Actions

• The S&P 500 was little changed as of 4 p.m. New York time

• The Nasdaq 100 rose 0.2%

• The Dow Jones Industrial Average index saw little change

• MSCI World Index remained unchanged

Coins

• The Bloomberg Dollar Spot Index was little changed

• The euro rose 0.2% to $1.0703

• The British pound rose 0.1% to $1.2639

• The Japanese yen remained unchanged at 160.81 per dollar

Cryptocurrencies

• Bitcoin rose 0.7% to $61,385.55

• Ether rose 1.7% to $3,446.92

Titles

• The 10-year Treasury yield fell four basis points to 4.29%

• The yield on German 10-year debt remained virtually unchanged at 2.45%

• The yield on 10-year UK bonds remained virtually unchanged at 4.13%

goods

• West Texas Intermediate crude rose 1.2% to $81.89 a barrel

• Spot gold rose 1.2% to $2,326.02 an ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Michael Msika, Carly Wanna, Richard Henderson, Divya Patil and Robert Brand.

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