Treasuries climbed after data underscored a gradual economic cooling, which reinforces speculation the Federal Reserve will end its aggressive hiking campaign amid the latest disinflation trend.
Two-year yields fell eight basis points to around 4.85%. The S&P 500 wavered after a torrid rally. Traders continued to sift through earnings from big-box retailers. Walmart Inc. slumped after striking a worrisome tone on the outlook for US consumers, while Macy’s Inc. climbed on profit that beat expectations. Cisco Systems Inc. sank more than 10% on a bearish forecast.
Continuing applications for US unemployment benefits rose to the highest level in almost two years, underscoring the increasing challenges unemployed workers are facing in finding new jobs. Factory production fell in October by more than expected, largely reflecting a strike-related pullback in activity at automakers and parts suppliers.
“It continues to be a good week for the Fed,” said Chris Larkin at E*Trade from Morgan Stanley. “It’s still too early for the Fed to declare victory on inflation — and rate cuts are still far off — but more data like this will tamp down lingering concerns about an additional hike. The question now is whether this type of ‘Fed-friendly data’ will continue to provide bullish momentum for the stock market.”
Chris Low, chief economist at FHN Financial, says the data released this week reduces the odds of a December rate hike.
“Inflation rising less-than-expected and less than in recent months is progress — and progress is enough to stay the hand of the Fed as long as it continues,” he noted.
Fed Bank of Cleveland President Loretta Mester said that while inflation has cooled, it’ll take time for it to fully return to the central bank’s 2% target. Mester, who doesn’t vote on policy decisions this year, said that there are many uncertainties to the economic outlook.
Meantime, Former Treasury Secretary Lawrence Summers said that “transitory factors” have been one element in a faster slowdown in US inflation than he anticipated.
A murky economic outlook and alluring returns on cash kept investors out of stocks this year despite their defiant run. Goldman Sachs Group Inc. thinks the wariness will persist into 2024.
“We expect positive returns to equities, but a 5% return risk-free in cash remains a competitive alternative,” David Kostin, the bank’s chief US equity strategist, said. “In the current interest rate environment, the 3-month Treasury bill yields 5.5%, similar to the earnings yield on the S&P 500 index.”