(Bloomberg) — Wall Street traders making their final bets on Wednesday’s key inflation report sent stocks lower as bonds rebounded after a recent selloff.
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Treasuries climbed, with 10-year yields dropping from the highest levels in 2024. Equities extended their April losses, with the S&P 500 breaking below 5,200. JPMorgan Chase & Co. and Wells Fargo & Co. — which are due to report earnings later this week — led declines in financial shares. Nvidia Corp. weighed on the megacap space, dropping almost 4%.
“Valuations are so stretched right now that anything less than perfection from economic data or any geopolitical noise can create substantial and quick selloffs,” said David Bahnsen at the Bahnsen Group. “Markets have been strong all year despite substantial changes in Fed rate cut expectations and a mixed bag of returns for last year’s so-called Magnificent Seven.”
With no relevant economic data on schedule — or Fedspeak — traders will be positioning for the consumer price index. Markets have been tempering bets on Fed cuts for days as US economic data remains resilient and officials have pushed back against the need for easing.
The S&P 500 hovered near 5,180. Intel Corp. unveiled a new version of its artificial-intelligence chip, while Boeing Co.’s deliveries in the first quarter were the lowest since mid-2021. US 10-year yields fell five basis points to 4.37%. Oil dropped as traders assessed diplomatic efforts in the Middle East. Gold rose to a fresh record.
“CPI is the critical number this week,” said Andrew Brenner at NatAlliance Securities. “The fear is that CPI has continued to be a thorn in the side of the Fed. But positioning is strongly bearish, and to quote some of the old traders we worked with in the past, ‘whatever hurts the most traders, when they are strongly positioned, is what happens’.”
The inflation prints for March and April will play an outsized role in determining whether the Fed proceeds to cut rates in June, according to Krishna Guha at Evercore.
“We think the hurdle is not crazy severe and the odds are the data will come in good enough to go ahead,” Guha noted.
A survey conducted by 22V Research shows that 53% of the investors think the reaction to CPI Wednesday will be “risk-on.”
“Fifty percent of our survey respondents think inflation is ‘not’ on a Fed-friendly glide path back to target,” said Dennis DeBusschere at 22V. “In February, the majority thought it was. The ‘yeses’ have been diminishing. Investors are not worried about Wednesday, but are concerned longer-term.”
To Mohamed El-Erian, the Fed’s longer-run inflation expectations should be revised higher as macro conditions — like supply chains and productivity — evolve.
“Inflation will be sticky,” the president of Queens’ College, Cambridge and a Bloomberg Opinion columnist told Bloomberg Television. “But that shouldn’t stop the Fed, because the 2% inflation target is too tight for a global economy going through a major rewiring.”
Former Fed Bank of St. Louis President James Bullard told Bloomberg Television he’s expecting three rate cuts this year as inflation moves toward the central bank’s target while the economy remains resilient.
“Cut timing hinges on inflation data,” according to Meghan Swiber at Bank of America Corp. “The market will be closely watching core goods and shelter for a read on the forward inflation trajectory.”
While bond yields are likely to remain volatile in the near term as markets shift views on the Fed’s path, UBS’s Chief Investment Office continues to see an attractive risk-reward outlook for quality bonds, including government and investment-grade corporate debt.
“We continue to favor quality bonds in our global portfolios and recommend investors lock in currently attractive bond yields,” said Solita Marcelli at UBS Global Wealth Management. “We prefer those with maturities in the 1–10-year bracket and see value in sustainable bonds.”
Following the recent reset in rate-cut expectations, the setback in stock markets should prove temporary and is a buying opportunity, according to HSBC strategists led by Max Kettner.
“Risk assets certainly got a scare last week,” they wrote. “We don’t think this will last, though.”
BofA clients were net sellers of US equities last week, with health-care shares logging their biggest outflow in the firm’s data going back to 2008 during the period.
Clients pulled $3.4 billion from US stocks in the week ended April 5, with single stocks seeing their largest exit since July, quantitative strategists led by Jill Carey Hall wrote in a note to clients.
To Craig Johnson at Piper Sandler, a more tactical approach toward equities is prudent as we move into the second quarter.
“Although the market has shown some signs of broadening recently, we don’t have enough technical evidence to be convinced that a new leg higher can be sustained,” he noted. “The combination of high interest rates, sticky inflation, a short-term extended equity market, and mediocre breadth makes the S&P 500 vulnerable to a 5%-10% pullback/correction in upcoming weeks/months.”
Corporate Highlights:
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Diamondback Energy Inc. is tapping the US investment-grade market with a bond offering to partly help fund its $26 billion takeover of Endeavor Energy Resources LP, joining other blue-chip companies capitalizing on robust investor demand to bring acquisition-related debt deals.
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Pfizer Inc.’s RSV shot produced immune reactions in young adults at higher risk of severe illness just as well as in older people, spurring the company’s plans to apply for wider US approval.
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Cisco Systems Inc. was resumed at overweight by Morgan Stanley, which said the maker of computer networking equipment’s valuation discount is “too harsh.”
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Google unveiled a host of updates to its artificial intelligence offerings for cloud computing customers, emphasizing that the technology is safe and ready for use in the corporate realm, despite recent stumbles in consumer-facing tools.
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Best Buy Co. is tapping artificial intelligence to speed up and reduce the number of in-home visits, part of the company’s efforts to use the technology to streamline operations.
Key events this week:
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Japan PPI, Wednesday
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Canada rate decision, Wednesday
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US CPI, Fed minutes, Wednesday
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Chicago Fed President Austan Goolsbee speaks, Wednesday
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China PPI, CPI, Thursday
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Eurozone ECB rate decision, Thursday
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US initial jobless claims, PPI, Thursday
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New York Fed President John Williams speaks, Thursday
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Boston Fed President Susan Collins speaks, Thursday
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China trade, Friday
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US University of Michigan consumer sentiment, Friday
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Citigroup, JPMorgan and Wells Fargo due to report results, Friday.
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San Francisco Fed President Mary Daly speaks, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.4% as of 11:43 a.m. New York time
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The Nasdaq 100 fell 0.2%
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The Dow Jones Industrial Average fell 0.5%
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The Stoxx Europe 600 fell 0.6%
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The MSCI World index fell 0.2%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.0857
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The British pound rose 0.2% to $1.2676
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The Japanese yen was little changed at 151.67 per dollar
Cryptocurrencies
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Bitcoin fell 3.7% to $69,083.51
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Ether fell 4.6% to $3,519.53
Bonds
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The yield on 10-year Treasuries declined five basis points to 4.37%
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Germany’s 10-year yield declined seven basis points to 2.37%
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Britain’s 10-year yield declined six basis points to 4.03%
Commodities
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West Texas Intermediate crude fell 0.8% to $85.71 a barrel
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Spot gold rose 0.3% to $2,346 an ounce
This story was produced with the assistance of Bloomberg Automation.
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