As Stocks Hit a Wall, Bond Yields Fall on Fed Bets

The global bond market, led by U.S. Treasuries, saw a significant rally as emerging signs of disinflation strengthened expectations that the Federal Reserve will reduce interest rates in the coming months.

‍

Treasury yields dropped sharply, with Fed swaps now projecting increased easing throughout 2024 and almost fully pricing in a rate cut for September. Equities declined following the S&P 500’s longest rally of the year, which raised concerns over valuations. Additionally, some disappointing corporate outlooks negatively affected market sentiment. Nvidia Corp. led the decline among megacap stocks. However, banks rose ahead of the earnings season, and small-cap stocks were poised for their best performance of the year.

‍

The core consumer price index (CPI), which excludes volatile food and energy prices, increased by just 0.1% from May, marking the smallest rise since August 2021. The year-over-year core CPI rose 3.3%, the slowest pace in over three years.

‍

Michael Feroli of JPMorgan Chase & Co. commented on the inflation data, saying, "Sticky inflation is coming unglued. We now think this paves the way for a first cut in September (previously November), followed by quarterly cuts thereafter."

‍

The yield on the 10-year Treasury dropped 10 basis points to 4.19%. This drop occurred despite the market having to absorb a $22 billion sale of 30-year bonds. The S&P 500 fell to around 5,600, while the Nasdaq 100 declined by 1.5%. In contrast, the Russell 2000 rose by 3.5%. Delta Air Lines Inc. experienced an industry-wide selloff due to a bearish outlook, and PepsiCo Inc. saw its stock sink on weaker-than-expected revenue growth.

‍

The dollar was on track for its biggest drop since mid-May. Meanwhile, Japan’s currency chief maintained his strategy of keeping market participants uncertain about whether Tokyo intervened to support the yen following sharp currency movements.

‍

The bond market's rally and the drop in Treasury yields were driven by signs of easing inflation and increased expectations of Federal Reserve rate cuts. The core CPI's modest increase and the year-over-year slowdown to 3.3% bolstered the outlook for potential rate cuts starting in September. As a result, equities saw mixed performance, with the S&P 500 and Nasdaq 100 declining while small-cap stocks and banks showed strength. The dollar weakened significantly, and the yen's movements remained under scrutiny as Japan's currency chief kept market players guessing about potential intervention.

‍

This combination of disinflationary signals and market movements underscores the shifting economic landscape, as investors anticipate the Federal Reserve's response to the evolving inflation and economic conditions.

‍

‍