Powell’s soothing tone may not soothe worried investors
Federal Reserve Chairman Jerome Powell’s reassuring message following the central bank’s monetary policy meeting may not calm frazzled U.S. stock and bond investors, as uncertainty over the path of ination intensies the focus on upcoming data.
Though Mr. Powell on Wednesday acknowledged a lack of recent progress in the Fed’s battle against rising consumer prices, he reiterated the view that interest rates are likely headed lower this year.
That was a relief for those worried the Fed could be eyeing more rate increases after straight months of ination.
Still, some investors believe the market will be less likely to take Mr. Powell at his word this time around after a much-heralded dovish pivot in December was followed by several months of upside surprises on ination and employment. Another string of robust economic data could revive rate hike fears and fuel further turbulence in stocks and bonds, they said.
Market swings on Wednesday reected investors’ nervousness: the S&P 500 closed down 0.3% following a rally that saw it gain more than 1% during Mr. Powell’s press conference. Yields on the benchmark three stronger-than-expected 10-year Treasury, which move inversely to prices, dropped nearly 10 basis points.
“If the Fed is going to be as data-dependent as they claim to be, every data point will be scrutinized by the market to see whether it means higher for longer, or the possibility that rate hikes are back on the table,” said Steve Hooker, a portfolio manager at Neweet Asset Management.
The rst key data point comes on Friday, with the closely watched U.S. employment report. More evidence of a stronger-thanexpected labour market could continue to erode forecasts for how deeply the Fed will cut rates this year. Investors are now pricing some 35 basis points of cuts in 2024, compared with more than 150 basis points priced in January.
Testing days
Data on everything from ination to retail sales follow later in the month.
Though stocks are not far from record highs hit earlier this year, their rally has wobbled as rate cut expectations have been whittled away in recent weeks, leading the S&P 500 to notch its worst performance since September last month.
Bond investors have been struggling for months, with the 10-year Treasury yield up 70 basis points year-to-date.
“Market expectations have swung from one extreme to another,” said Paul Mielczarski, head of global macro strategy at Brandywine Global. He is overweight ve and sevenyear Treasuries relative to his rm’s benchmark in anticipation that the Fed will eventually cut rates more than the market expects.
“Naturally the market is a little bit cautious ... and is waiting for the data to conrm the Fed’s underlying view that ination can come down to 2% without needing a recession,” he said.
Some investors fear the clock may be running out for the Fed to cut rates, though it’s relatively early in the year. Blerina Uruci, chief U.S. economist at T Rowe Price, believes the Fed will need to have at least three months of weaker-than-expected data to be condent enough to cut rates.
Others worry that elevated rates will soon start pressuring some U.S. companies. Jonathan Duensing, head of U.S. xed income at Amundi US, favors investment grade corporate debt partially because he believes a prolonged period of high interest rates could create some stress in lower-rated companies.
He was also bullish on Treasuries that would likely benet from a ight-toquality bid in case “of a stumble in the economy down the road,” he said.