The US Yields Spike as the S&P 500 Trims Gains by Half

On Monday, Treasury bonds experienced a sell-off driven by robust retail sales figures, leading traders to speculate that the Federal Reserve would not rush to cut interest rates. Additionally, market participants prepared for a wave of bank debt sales.

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As a result of the sell-off, yields on benchmark 10-year Treasuries reached new highs for 2024, exerting downward pressure on the rate-sensitive technology sector. The S&P 500, which had initially approached a 1% gain earlier in the session, pared most of its advance. West Texas Intermediate oil traded below $85 per barrel, partially recovering from losses after reports from Axios suggested potential retaliation by Israel against Iran.

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Chris Larkin, from E*Trade at Morgan Stanley, highlighted geopolitical tensions in the Middle East as a variable affecting market sentiment. He noted that investors must move past concerns about delayed rate cuts due to persistent inflationary pressures.

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The S&P 500 hovered around 5,140, with tech shares experiencing losses, particularly Salesforce Inc., amid speculation of acquisition talks with Informatica Inc. Banks, however, outperformed following a surprising profit announcement from Goldman Sachs Group Inc.

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Treasury 10-year yields surged by 12 basis points to 4.64%, while two-year notes came close to 5% earlier in the trading day. Torsten Slok, from Apollo Global

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Management, attributed the strong economic momentum to favorable financial conditions, driving inflation and growth, including robust consumer spending in March.

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Slok suggested that due to the ongoing economic acceleration, the Federal Reserve would likely refrain from interest rate cuts in 2024. This shift in expectations towards a later start for Fed rate cuts reflects the central bank's requirement for greater confidence in the sustainability of inflation returning to its 2% target.

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John Stoltzfus, at Oppenheimer Asset Management, emphasized the importance of the Fed's "pause for now" stance on interest rates, stressing the need for inflation to ease. Chris Zaccarelli, at Independent Advisor Alliance, emphasized the resilience of the consumer sector based on recent retail sales data, cautioning investors about potential conflicts between strong corporate profits and lower interest rates.

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Sam Stovall, from CFRA, echoed concerns about delayed rate cuts affecting investor sentiment, particularly amid persistent inflation readings. However, historical data suggested that market corrections were typically short-lived, advising long-term investors to remain focused on buying opportunities.

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Despite concerns about inflation and interest rates, analysts at Jefferies LLC, JPMorgan Chase & Co., Citigroup Inc., and State Street Corp. maintained optimism about the stock market rally, citing strong economic data and corporate earnings as key drivers.

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Bank of America Corp. strategists emphasized the distinction between sticky inflation driven by economic momentum, which could benefit equities, and stagflation, which poses risks. Jason Draho, at UBS Global Wealth Management, noted that although inflationary pressures may challenge the market, overall macro conditions support risk assets.

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JPMorgan Chase & Co. strategists cautioned that while upbeat corporate earnings may sustain the market rally, much of the optimism is already priced in. Similarly, BlackRock's Investment Institute highlighted signs of earnings growth diversifying beyond the technology sector, supporting broader market sentiment.

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Wells Fargo Investment Institute revised its year-end forecast for the S&P 500 Index, anticipating further gains amid an improving economic outlook and accommodative financial conditions. However, strategists warned of potential market disappointments related to inflation and interest rate trends.

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In the absence of significant oil price spikes due to Middle East tensions, markets are expected to refocus on Fed policies, according to Citigroup Inc. strategists. They viewed recent geopolitical events as unlikely to escalate further in the short term.

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Overall, market analysts remain cautiously optimistic about the stock market's trajectory, despite ongoing uncertainties surrounding inflation, interest rates, and geopolitical tensions.

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