The week concluded on a relatively optimistic note in the stock market, as traders carefully assessed the latest economic indicators and statements from Federal Reserve officials for insights into the potential for future interest-rate cuts.
Despite the S&P 500 hovering near its record high, buoyed by indications of robust consumer confidence and diminished inflation expectations, the impact on Wall Street on Friday was somewhat muted. Treasury yields experienced a modest increase, and market volatility remained relatively subdued.
Ian Lyngen, from BMO Capital Markets, characterized the recent data as encouraging from the Federal Reserve's perspective. However, he noted that there was little in the releases that would significantly alter macroeconomic expectations.
Austan Goolsbee, President of the Federal Reserve Bank of Chicago, suggested that a sustained decline in inflation could prompt discussions about rate cuts, emphasizing that decisions would be made on a meeting-by-meeting basis. Goolsbee made these remarks just before the customary pre-meeting communications blackout period.
The S&P 500 managed to erase losses from earlier in the week, and the Nasdaq 100, dominated by technology stocks, outperformed, reaching a new record on Thursday. Meanwhile, Treasury 10-year yields saw a slight uptick, and the dollar exhibited some wavering.
According to economist Mohamed El-Erian, the markets are overestimating the speed and extent of potential Fed rate cuts while overlooking persistent inflationary pressures. El-Erian, who serves as the President of Queens’ College, Cambridge, and is a Bloomberg Opinion columnist, believes that the adjustment will occur, but it may not be as rapid or extensive as the market anticipates.
As economic data continued to demonstrate resilience in the U.S., and Federal Reserve officials emphasized the need to curb inflation before considering rate cuts, traders tempered their expectations for such cuts. Two-year yields were nearly on par with those on 30-year bonds by Friday morning in New York. Market expectations for Fed rate cuts have moderated to approximately 1.4 percentage points this year, down from the previous estimate of as much as 1.7 percentage points just a week ago. The likelihood of rate cuts in March, which had been widely anticipated, is now viewed as more uncertain.
After projections released post their December meeting indicated three potential rate cuts, the Federal Reserve, having left interest rates unchanged last month, is expected to maintain rates within a range of 5.25% to 5.5% during their upcoming meeting on January 30-31.
Bank of America Corp.’s Michael Hartnett observed that the stocks leading the rally in 2023 are once again the preferred choices for traders. Investors are reverting to holdings in growth, technology, the "AI bubble," and the so-called "Magnificent Seven" sectors.
While U.S. shares experienced redemptions of $4.3 billion in the week through January 17, tech-stock funds saw the most significant two-week inflow since August, totaling $4 billion, as reported by BofA, citing EPFR Global data. In summary, the market sentiment has cooled somewhat, but it remains distinctly positive, according to Peter Boockvar, author of the Boock Report.
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