Stocks Hit as ‘Economic Warnings’ Sink the US Yields

Stocks took a hit as bond prices surged following weak economic data, raising concerns that the Federal Reserve might be delaying rate cuts for too long.

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The yield on the 10-year Treasury fell below 4%, with swap traders fully pricing in three rate cuts this year. Ahead of the US jobs report, data revealed that unemployment claims had reached their highest level in nearly a year, and manufacturing activity saw its largest decline in eight months. While policy easing is generally positive for Corporate America, the economic concerns led to a decline in equities.

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Federal Reserve Chairman Jerome Powell indicated on Wednesday that officials plan to cut rates in September unless progress on inflation stalls, pointing to risks of further weakening in the labor market. Neil Dutta from Renaissance Macro Research noted that the “ongoing deterioration” in economic data has become evident and warned that the Fed may appear behind the curve until they start cutting rates.

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Chris Senyek of Wolfe Research commented that the labor market has been showing warning signals over the past few months. Historical trends suggest that Powell is navigating a delicate balance, risking waiting too long to start rate cuts before it becomes critical.

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The 10-year Treasury yield dropped four basis points to 3.99%, while the S&P 500 fell below 5,500. Qualcomm Inc., a chipmaker, saw its stock tumble due to concerns that the phone market is recovering more slowly than investors had hoped. Meanwhile, Meta Platforms Inc. saw a boost after beating sales expectations. Upcoming earnings from Apple Inc. and Amazon.com Inc. will be crucial in guiding the Nasdaq 100 after a period of volatility.

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The British pound fell after the Bank of England cut rates and hinted at further cautious reductions in the future.

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George Ball of Sanders Morris noted that a rate cut could be viewed negatively for stocks if accompanied by the Federal Reserve expressing concerns about the economy. While this scenario is unlikely, it is not impossible.

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Thomas Ryan at Capital Economics stated that the decline in manufacturing raises the risk that US growth will lose momentum in the third quarter. Additionally, the drop in the employment index heightens concerns that the Fed has delayed loosening policy for too long.

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Chris Zaccarelli of Independent Advisor Alliance mentioned that a significant deterioration in the job market would likely prompt the Fed to cut rates more aggressively, a situation they are closely monitoring.

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This week, the Federal Reserve is a major topic for global investors trying to anticipate rate cuts. Interestingly, it has also become a prominent feature in Corporate America’s post-earnings conference calls.

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According to a Bloomberg analysis of S&P 500 and Stoxx 600 companies' transcripts, the term “Federal Reserve” was on track to be mentioned about 380 times during second-quarter calls with analysts. If this pace continues, it would mark the highest frequency ever recorded in the database since 2001.

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A contrarian stock indicator from Bank of America Corp. rose last month, indicating heightened Wall Street sentiment. Although the gauge remains in “neutral” territory rather than at outright “buy” or “sell” thresholds, the extremely bearish attitudes towards equities are no longer providing the upside momentum seen last year.

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As risk-on momentum in US stocks showed signs of easing in July, several computer-based systematic strategy funds reduced their equity exposure. However, they may not be finished selling yet.

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Commodity trading advisers (CTAs) cut their equity positions to a two-month low in July, according to Bank of America Corp. These funds typically use a combination of price-trend signals and volatility to determine their allocation. As the stock market's advance stumbled, CTAs reduced their positions as well.

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Chintan Kotecha, senior equity derivatives research analyst at BofA Securities, suggested that CTAs remaining long on US stocks should continue to reduce their positions in the near term as the rally shows signs of stalling.

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