(Bloomberg) — Two-year Treasury yields fell to their lowest level since May as a surprise drop in producer prices added to bets that the Federal Reserve will cut interest rates this year.
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Traders expect a chance of a Fed rate cut in March to be about 80%, up from just over 50% a week ago. Friday's economic data came a day after a higher-than-estimated rise in consumer prices – highlighting the bumpy road leaders face in bringing inflation to the 2 percent target. As earnings season begins in the U.S., investors also examined bank results while monitoring geopolitical developments ahead of Martin Luther King Jr. Day on Monday.
“We suspect there is little to stop the market from pushing for the March rate cut,” said Ben Jeffery of BMO Capital Markets. “Let’s not forget the geopolitical escalations in the Red Sea and the associated overall risk – relevant from both a flight to quality and supply side inflation perspective.”
U.S. two-year yields fell 10 basis points to 4.15%. Traders have priced in an easing of around 20 basis points for March. Given that Fed rate changes have historically come in 25 basis point increments, swap contracts still show bets on the first rate cut in May. The S&P 500 was little changed on Friday, but posted a weekly gain. Microsoft Corp. overtook Apple Inc. to become the most valuable publicly traded company in the world. Bitcoin slipped. Oil prices rose as the US and its allies launched airstrikes against Houthi rebels in Yemen.
The main reasons for the decline in inflation last year included falling energy costs and supply chains that had largely overcome the impact of the pandemic. The Red Sea turmoil is hampering both disinflationary forces that central bankers had hoped could help them do their job.
The story goes on
“This is a world where we are fragile on the supply side to begin with, and then you have this additional shock,” Mohamed El-Erian, president of Queens' College, Cambridge and a Bloomberg Opinion columnist, said in an interview on Friday Bloomberg Television.
For Chris Larkin of Morgan Stanley's E*Trade, it may be a bit of a stretch to call Friday's weaker-than-expected inflation numbers a “surprise,” given that producer prices have been falling faster than consumer numbers for some time.
“The market tends to run on any data that fits the 'falling inflation means lower interest rates' narrative, but we will see if that action clashes with the reality of a market that has already priced in multiple rate cuts,” he said written down.
Still, the Fed can still take comfort that inflation has slowed since its peak in mid-2022. The trend of easing price pressures explains why policymakers are planning interest rate cuts in 2024.
Investors have scaled back their expectations of hawkish surprises from the Fed this year as they see a growing risk of such moves from central banks in the euro zone and other regions, Bank of America's latest monthly sentiment survey shows.
The number of respondents who expect policies to be more restrictive than market prices fell to 33% in the bank's latest survey, from 51% in December. Despite the decline, “the Fed is still seen as more likely to deliver a hawkish surprise than others,” BofA strategists including Ralf Preusser wrote in a note.
Barclays economists expect the Fed to begin easing monetary policy sooner – and are now calling for the first start in March rather than June.
“Given the recent progress on inflation, we expect the FOMC to be comfortable with rate cuts without the need for a significant slowdown in the economy or labor market,” wrote Marc Giannoni and Jonathan Millar.
After the big rally in U.S. stocks in the fourth quarter, investors are focused on the results that companies need to show on their earnings scorecards.
There isn't much anchored in expectations, so there's room for a positive surprise: Analysts expect fourth-quarter earnings for S&P 500 members to rise an average of 1.1% from a year earlier, according to data smallest positive number since pre-pandemic would be compiled by Bloomberg Intelligence Show. The stock benchmark rose 11% last quarter, its best performance since 2020.
On Friday, executives at some of Wall Street's biggest banks took turns calling for an end to the record run of their biggest source of revenue. Wells Fargo & Co. surprised analysts by forecasting a 9% decline in net interest income for 2024, while Citigroup Inc. forecast a slight decline this year. Even JPMorgan Chase & Co., which expects its 2024 transportation volume to remain at 2023 levels, predicts it will decline throughout the year.
Company highlights:
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JPMorgan Chase & Co. completed the most profitable year in U.S. banking history with its seventh straight quarter of record net interest income and a surprise forecast that the windfall could continue this year.
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Wells Fargo & Co.'s costs came in higher than expected in the fourth quarter, reflecting severance costs and the bank's contribution to replenishing the Federal Deposit Insurance Corp.'s main fund. after bank failures last year.
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Citigroup Inc. said it would cut 20,000 jobs, saving up to $2.5 billion. This is part of CEO Jane Fraser's efforts to boost the Wall Street giant's declining returns.
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Bank of America Corp.'s earnings fell short of expectations as the bank's numerous charges hurt fourth-quarter profits and the company's fixed-income dealers posted a surprise drop in revenue.
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BlackRock Inc. clients piled into its long-term funds in the fourth quarter, investing $63 billion in ETFs and other products. It was a sign that investors were putting their cash to work as stock and bond markets soared.
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Delta Air Lines Inc. deviated from its 2024 profit target as persistently high costs counteract gains from a recovery in international travel.
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A day after launching a formal investigation into the plane maker over last week's accident involving a 737 Max 9 jet, the U.S. Federal Aviation Administration said it was increasing its oversight of Boeing Co.'s manufacturing and manufacturing operations become.
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Lockheed Martin Corp. and NASA plan to give the public a taste of a plane that could pave the way for airlines to dramatically speed up their flights.
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Some creditors of Dish Network Corp. are exploring legal options, including sending the company a demand for payment after it moves valuable assets out of the reach of bondholders, people familiar with the matter say.
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UnitedHealth Group Inc. reported higher fourth-quarter medical costs than Wall Street analysts expected, although overall results beat estimates.
Some of the key moves in the markets:
Shares
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The S&P 500 was little changed at 4 p.m. New York time
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The Nasdaq 100 has barely changed
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The Dow Jones Industrial Average fell 0.3%
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The MSCI World Index rose 0.3%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro fell 0.2% to $1.0950
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The British pound fell 0.1% to $1.2745
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The Japanese yen rose 0.3% to 144.92 per dollar
Cryptocurrencies
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Bitcoin fell 5.1% to $43,796.86
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Ether fell 1.2% to $2,572.03
Tie up
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The 10-year Treasury yield fell two basis points to 3.94%
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The 10-year German government bond yield fell five basis points to 2.18%
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The 10-year UK government bond yield fell five basis points to 3.79%
raw materials
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West Texas Intermediate crude rose 1% to $72.73 a barrel
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Spot gold rose 0.9% to $2,047.15 an ounce
This story was produced with support from Bloomberg Automation.
–With assistance from Cecile Gutscher, Naomi Tajitsu, Elena Popina and Michael Mackenzie.
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