Bond yields rose and stocks fell on speculation Wall Street’s bets on aggressive Federal Reserve rate cuts have gone too far.
Wall Street remained on the lookout for comments from policymakers, with Fed Governor Christopher Waller saying officials can reduce rates absent a rebound in inflation — but he emphasized the central bank should be methodical and careful with the pace of easing. His comments also appeared to push back against market expectations for as many as six rate cuts this year.
That’s more than twice as much as Fed officials signaled in December in their last round of quarterly forecasts. Since then, evidence of easing in labor-market tightness and inflation has ginned up traders to remain locked into bets for aggressive easing this year — though the exact degree of total reduction has ebbed and flowed around key data releases.
“I sense that the first quarter of this year will be marked by the realization that it’s too early for the central banks to cut the interest rates,” said Ipek Ozkardeskaya, a senior analyst at Swissquote. “In the US, the resilient growth, healthy jobs market and sustained fiscal spending into the presidential election suggest no urge for a Fed cut in March.”
The S&P 500 lost traction, following last week’s advance. Goldman Sachs Group Inc. topped earnings estimates as its equities-trading unit posted a jump in revenue, while Morgan Stanley’s traders fell short again, dragging down profit at the firm. Treasury 10-year yields topped 4%, while the dollar hit a one-month high.
Optimism over lower rates has spurred investors to up their exposure to US equities to the highest in over two years, according to a Bank of America Corp. fund-manager survey. To Art Hogan at B Riley Wealth, it’s more important to focus on the why the Fed is cutting rates instead of the when.
“If the wheels are coming off the economic cart and the Fed feels the need to rush in to stimulate, that would be sub-optimal,” Hogan noted. “The good rate cuts would come as the path of inflation continues toward the Fed’s target, and they find themselves to be overly restrictive.”
Meantime, earnings estimates have been slashed so much over the past three months that Wall Street strategists now expect most companies will easily beat analyst forecasts this season.
There’s however little reason to cheer, as Morgan Stanley strategists noted that a 7% cut to fourth-quarter profit estimates means US companies are poised to report almost no growth compared to the year before. That’s “creating a lowered bar and a higher probability” of yet another mid-single-digit earnings-per-share beat rate, Michael Wilson said.
This article was provided by Bloomberg News.