Stocks rally fanned by hopes of Fed’s ‘past hawkishness’ According to Reuters

© Reuters. FILE PHOTO: A Wall Street sign outside the New York Stock Exchange in New York City, New York, U.S., October 2, 2020. REUTERS/Carlo Allegri

By David Randall

NEW YORK (Reuters) -Tinad could once again be good news on Wall Street, as signs of US growth slow, fans hope that the Federal Reserve may not need to tighten policy much as previously expected.

Home sales fell for a third straight month, while retail giants like Target Corp (NYSE:) and Walmart (NYSE:) Inc rocked their stock prices last week. The Atlanta Fed’s GDPNow estimate of real GDP growth for the second quarter fell to 1.8% on May 25, from 2.4% the previous week.

Economic growth then raises the risk of weaker corporate earnings, theoretically paving the way for softer stock prices. Several Wall Street banks have warned in recent weeks that the possibility of a U.S. recession is growing, along with the growing possibility of a high-inflation, low-growth environment known as stalling inflation.

In the short-term, however, some investors believe that an early decline could bolster the case that the Fed pulls back on the positive monetary policy tilt that has displeased investors and helped drive to the top of the 20% drop that many call a bear market..

The index is up 6.6% this week, ending a seven-week losing streak, although it has fallen about 13% this year. Data from BofA Global Research shows weekly net inflows into US stocks standing at a 10-week high.

“It’s very clear that everyone at the Fed is in for 50 basis points (rate hikes) for the next two walk-in meetings. But after that, it’s not clear what they do and if there’s a significant drop in the rate. growth, they can wait a bit,” said Anwiti Bahuguna, senior portfolio manager and head of multi-asset strategy at Columbia Threadneedle Investments, who recently increased his allocation to equities.

BofA strategists fear the impact of higher interest rates at a time when inflation may have peaked will likely mean the central bank will pause tightening in September to The benchmark overnight rate ranges between 1.75% and 2% if financial conditions deteriorate. said in a note.

Expectations of Fed hawkishness have eased, with investors now pricing in a 35% probability that the Fed rates will be between 2.25% and 2.50% after the September meeting. compared with 50% probability a week ago, according to CME.

The Fed has raised interest rates by 75 basis points this year. Minutes of the central bank’s latest meeting showed officials grappling with how best to navigate the economy toward lower inflation without triggering a recession or essentially pushing unemployment. higher.

Anders Persson, global head of fixed income investment at Nuveen, said signs that growth may be slowing have helped boost Treasury prices, suggesting investors are increasingly looking to Bonds for safety rather than assets can be at risk in times of high inflation, said Anders Persson, global fixed income investment director at Nuveen.

The yield on the benchmark 10-year Treasury note, which moves inversely with price, hit a six-week low of 2.706% on Thursday, after surging to a high of 3.14% this month.

“The market is pricing in a recession, but not a recession, making riskier parts of the fixed-income market, such as high-yield bonds, attractive,” Persson said. than.

US data on Friday also suggested that price gains may be slowing. The personal consumption expenditures (PCE) price index rose 0.2%, the smallest increase since November 2020, after rising 0.9% in March.

A potentially less hawkish Fed doesn’t necessarily give equity buyers the green light over the long term. With inflation at its highest level in decades, concerns have grown about impending stalling inflation, a phenomenon that weighed on all asset classes during the supply shocks of the 1970s.

Among those who issued the warning was hedge fund manager Bill Ackman, a member of the Fed’s investor advisory committee on financial markets, who on Twitter (NYSE:) this week called on the central bank to The central bank quelled inflation by raising interest rates more aggressively.

Meanwhile, Citi’s global asset allocation team this week cut equity allocations in the US to “neutral”, saying that “while the US recession is not the case… fundamental to the Citi economy, uncertainty is very high.”

However, some investors believe a turning point may be near.

Esty Dwek, chief investment officer at FlowBank, is betting that the central bank will start to see signs that inflation and growth are slowing in August, when policymakers hold a meeting. their annual meeting in Jackson Hole, Wyoming.

“The Fed is past its hawkish era at its peak,” she said.

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