Stocks, Bonds Regain Footing After Inflation Jolt: Markets Wrap

On Feb 14, 2024

(Bloomberg) — US equity futures and Treasuries signaled a small rebound from Tuesday’s Wall Street slump triggered by hotter-than-expected US inflation data that fueled bets the Federal Reserve may not cut interest rates as soon as expected.

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Contracts on the S&P 500 ticked higher after the worst inflation-day drop for the index since September 2022. Benchmark Treasury yields retraced some of the previous day’s surge, but held above 4.2%, as traders trimmed bets for an early Fed rate cut. The US inflation figures have erased the last remnants of a global bond rally that started in December with the hope that the Fed had finally pivoted to favor an easing.

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“I have been surprised at how resilient the stock market has been to what has been sharp moves in bond markets over the past few days,” Hugh Gimber, global market strategist at JPMorgan Asset Management, said in an interview with Bloomberg TV. “It tells you not so much about the economy, it tells you more about market positioning. It tells you how excited people have become around this notion of immaculate disinflation, where we just see inflation cruising back to target without needing to see weakness in growth.”

The American CPI data came as a disappointment for investors after a recent downdraft in price pressures that helped build expectations for rate cuts this year. The numbers also gave credence to the wait-and-see approach highlighted by Jerome Powell and a chorus of Fed speakers. Swap traders ratcheted down their expectations for a Fed cut before July while the stock market’s “fear gauge” — the VIX — closed above 15 for the first time since November.

There was better news Wednesday for UK traders looking forward to policy easing by the Bank of England. Inflation in Britain came in lower than forecast in January, with underlying price pressures not rising as much as markets and the BOE feared. The pound reversed earlier gains after the data, while UK bonds rallied.

Meanwhile, Europe’s Stoxx 600 index was steady as investors assessed the latest earnings news. Heineken NV fell 6.5% after warning that persistent inflation and economic worries will weigh on beer demand in 2024. ABN Amro Bank NV rallied after it unveiled a fresh share buyback with the Dutch state participating, as part of its planned sell down in the lender.

Swap contracts referencing Fed policy meetings — which as recently as mid-January fully priced in a rate cut in May and 175 basis points of easing by the end of the year — were roiled. The odds of a May cut dropped to about 32% from about 64% before the inflation data, with fewer than 90 basis points anticipated this year.

In the UK, consumer prices rose 4% in January compared to a year earlier, the same pace as in December, the Office for National Statistics said Wednesday. The BOE and private-sector economists had expected inflation to tick higher to 4.1%.

The inflation data triggered a repricing in BOE rate bets, with traders resuming wagers on three quarter-point reductions this year. Money markets priced about 72 basis points of easing in 2024, compared to 61 basis points the previous day.

Oil steadied after a mixed US inventory report, while OPEC and the IEA offered contrasting outlooks for the global crude market. Gold was locked in a narrow range after plunging below $2,000 an ounce for the first time in two months while Bitcoin traded near the $50,000 mark.

Key Events this Week:

Eurozone industrial production, GDP, Wednesday
BOE Governor Andrew Bailey testifies to House of Lords economic affairs panel, Wednesday
Chicago Fed President Austan Goolsbee speaks, Wednesday
Fed Vice Chair for Supervision Michael Barr speaks, Wednesday
Japan GDP, industrial production, Thursday
US Empire manufacturing, initial jobless claims, industrial production, retail sales, business inventories, Thursday
ECB President Christine Lagarde speaks, Thursday
Atlanta Fed President Raphael Bostic speaks, Thursday
Fed Governor Christopher Waller speaks, Thursday
ECB chief economist Philip Lane speaks, Thursday
US housing starts, PPI, University of Michigan consumer sentiment, Friday
San Francisco Fed President Mary Daly speaks, Friday
Fed Vice Chair for Supervision Michael Barr speaks, Friday
ECB executive board member Isabel Schnabel speaks, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures rose 0.2% as of 4 a.m. New York time
Nasdaq 100 futures rose 0.4%
Futures on the Dow Jones Industrial Average rose 0.1%
The Stoxx Europe 600 rose 0.1%
The MSCI World index was little changed

Currencies

The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.0702
The British pound fell 0.3% to $1.2557
The Japanese yen rose 0.1% to 150.58 per dollar

Cryptocurrencies

Bitcoin rose 2.3% to $50,717.51
Ether rose 2.8% to $2,708.49

Bonds

The yield on 10-year…