US stocks rise as recession chances have dwindled: Markets Wrap

(Bloomberg) – U.S. stocks edged a small gain, while Treasuries fell as investors weighed what it would take to finally reverse the Federal Reserve’s stance on interest rates after a credit demand survey showed signs of a credit tightening.

Most read by Bloomberg

The S&P 500 ended the day little changed after teetering between gains and losses in a subdued session Monday. The gauge was up 1.9% on Friday to end its longest losing streak since February. The tech-heavy Nasdaq 100 gained 0.2% as AI-enabled chipmakers Advanced Micro Devices Inc. and Nvidia Corp. alongside Google parent company Alphabet Inc.

A measure for the dollar erased losses after the Fed’s Senior Loan Officers opinion poll signaled the credit market tightened slightly while demand for corporate loans eased. The yield on the policy-sensitive two-year government bond rose to 4.01%. Syndicate desks are gearing up for up to $35 billion in corporate bond sales this week, while Apple Inc. launched a $5.25 billion sale.

US stocks have traded sideways since early April as better-than-feared corporate earnings offset concerns about an economic slowdown and the health of regional banks. PacWest Bancorp rose 3.6% while lenders traded mostly lower, with the KBW Regional Banking Index falling 2.8%.

“Stress in the US banking sector and a looming debt ceiling are increasing near-term recession risk,” said Marko Kolanovic, chief strategist at JPMorgan Chase & Co will not create space for pre-emptive easing by the Fed this year.”

Still, swap traders remain optimistic the Fed is poised to pause as contracts suggest rate cuts will start as early as the July meeting, with at least two quarter-point cuts by year-end.

The story goes on

“Continued strong economic data suggests such a significant shift in Federal Reserve sentiment is unlikely,” said Seema Shah, chief global strategist at Principal Asset Management. “The conditions needed for the Fed to pivot and cut rates are grim and require a desperately struggling economy or financial crisis. Investors: Be careful what you wish for.”

Wednesday’s consumer inflation data could provide further clues to the Fed’s interest rate path and set the tone for equities.

“Traders will be excited to see if this week’s inflation numbers can push stocks out of their recent consolidation. The S&P 500 has not posted a weekly gain or loss of at least 1% since March — its longest streak in nearly two years,” said Chris Larkin, managing director of trading and investing at E*Trade Financial.

tech sector

Tech stocks were trading at a 49% premium to the rest of the S&P 500, according to analysis by Goldman Sachs. Sector bulls argue that the valuation premium is supported by the earnings growth outlook and a macro backdrop of slowing GDP growth and falling interest rates.

“However, if the economic outlook improves and interest rates rise, further valuation expansion will be challenging and more cyclical stocks are likely to outperform,” wrote the bank’s strategists, led by David Kostin. “When the economy goes into recession, the popularity of mega-cap technology in long hedge fund portfolios makes stocks vulnerable.”

Debt ceiling stalemate

The flight in US bank stocks has the S&P 500 financial index on the verge of slipping back below its 2007 peak.

Meanwhile, Treasury Secretary Janet Yellen “simply doesn’t see good options” to resolve Washington’s debt ceiling impasse without Congress raising the ceiling. She even warned that recourse to the 14th amendment would provoke a constitutional crisis.

“The deficit ceiling is political football, and with 2024 being an election year, both sides are trying to pick up political points,” said Louis Navellier, chief investment officer of Navellier & Associates. “However, the Biden administration has the most to lose, so it will be interesting to see if there will be caps on federal spending. As long as government bond yields don’t panic, investors shouldn’t panic either.”

Elsewhere, oil rallied as investors assessed a complex outlook for global demand after a period of volatile trading. Bitcoin slipped below $28,000 and hit session lows after SLOOS data.

Important events this week:

• US President Joe Biden has scheduled a meeting with top congressmen on Tuesday to limit debt

• New York Fed President John Williams addresses the Economic Club of New York on Tuesday

• US CPI, Wednesday

• China PPI, CPI, Thursday

• UK BOE Rate Decision, Industrial Production, GDP, Thursday

• US PPI, Initial Jobless Claims, Thursday

• Group of seven finance ministers and central bank governors meet in Japan on Thursday

• University of Michigan consumer sentiment, Friday

• Fed Governor Philip Jefferson and St. Louis Fed President James Bullard will participate in a monetary policy panel at Stanford University on Friday.

Some of the key movements in the markets:

Shares

• 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 fell 0.2%

• MSCI World Index up 0.2%

currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro fell 0.2% to $1.1002

• The British pound fell 0.2% to $1.2616

• The Japanese yen fell 0.3% to 135.14 per dollar

cryptocurrencies

• Bitcoin fell 5.5% to $27,352.7

• Ether fell 4.7% to $1,830.04

Bind

• The 10-year government bond yield rose eight basis points to 3.51%

• The 10-year German government bond yield rose three basis points to 2.32%

• The 10-year UK government bond yield rose 13 basis points to 3.78%

raw materials

• West Texas Intermediate crude rose 2.1% to $72.84 a barrel

• Gold futures rose 0.2% to $2,029 an ounce

This story was created with the support of Bloomberg Automation.

–Assisted by Vildana Hajric and Edward Bolingbroke.

Most Read by Bloomberg Businessweek

©2023 Bloomberg LP