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Bond Yields Sink as Fed Bets Are Fueled by Weak Data

June 3, 2024
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Treasuries rose as weak manufacturing data spurred speculation that the Federal Reserve might cut interest rates this year. Bonds started the week positively after a report indicated that U.S. factory activity contracted at a quicker pace, with output nearing stagnation and a significant drop in orders. In contrast, stocks struggled, particularly energy companies, as oil prices plummeted. An apparent glitch at the New York Stock Exchange caused trading halts in about a dozen companies shortly after the market opened. The NYSE reported issues related to the limit up-limit down trading bands.

Gary Pzegeo of CIBC Private Wealth US commented, "The Manufacturing ISM data reaffirmed several prevailing economic trends: decelerating inflation, slowing growth, and a tight labor market. This should increase the odds of a rate cut later this year, as reflected in interest rate futures."

The yield on the U.S. 10-year Treasury note fell by nine basis points to 4.41%. Meanwhile, the S&P 500 hovered around 5,270 points. Oil producers experienced significant declines as Brent crude oil dropped below $80 per barrel for the first time since February. The tech-heavy Nasdaq 100 outperformed, driven by Nvidia Corp. and Advanced Micro Devices Inc., whose executives showcased new chip generations fueling the global AI boom.

Oscar Munoz of TD Securities stated, "While the manufacturing ISM already registered an unexpected drop in May, we believe the services ISM will be more relevant for the economic outlook. We will particularly focus on the employment component."

Traders are also eyeing various labor-market reports this week, including Friday’s jobs report, ahead of next week’s Federal Reserve decision. U.S. policymakers are expected to signal no immediate rush to cut rates. Currently, swap markets fully price in a quarter-point rate reduction only in December.

Munoz added, "Additional cooling in job openings this week would also reinforce the idea that the labor market is no longer a significant threat to near-term inflation dynamics."

A contrarian equity sentiment indicator from Bank of America Corp. surged in May to a two-year high, indicating that negative attitudes towards U.S. stocks are no longer providing a tailwind. The Sell-Side Indicator (SSI), which measures Wall Street strategists’ average recommended U.S. equity allocations, saw its largest increase since December, noted BofA's head of U.S. equity and quantitative strategy, Savita Subramanian, in a client note.

"Extreme bearish sentiment is no longer a tailwind for the index, suggesting a shift towards active stock selection strategies," Subramanian wrote.

JPMorgan Chase & Co. strategists caution that investors betting on further U.S. equity gains in the coming months may be disappointed. However, Morgan Stanley's strategists hold a more optimistic view.

"We see the market's upside as limited during the summer due to the inconsistency between the consensus call for disinflation and the simultaneous belief in no landing and earnings acceleration," a JPMorgan team led by Mislav Matejka wrote.

Conversely, Michael Wilson of Morgan Stanley argues that his bullish case remains valid for now. He suggests that rising government debt will continue to fuel spending and inflate asset prices, including equities, in the short term — provided the bond market does not signal any tension.

Cathy Hills
Associate Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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