(Bloomberg) — Bond yields rose and stocks fell on speculation Wall Street’s bets on aggressive Federal Reserve rate cuts have gone too far.
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Fed swaps show the probability of easing as soon as March fell to 65% from almost 80% Friday, with Governor Christopher Waller appearing to push back against expectations for as many as six rate cuts this year. That’s more than twice as much as officials signaled in December. “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past,” he noted.
To Krishna Guha at Evercore, while it’s not fair to characterize Waller’s remarks as “outright hawkish,” his speech was notably “less dovish” than what many investors expected.
“We view his comments emphasizing no need to rush as indicating that he does not expect to push for a March cut — and read his arguments in general as more consistent with our baseline of a first cut in May or June,” Guha noted.
US 10-year yields topped 4%, dollar rose the most since March and the S&P 500 lost steam. Morgan Stanley slid amid a warning on lower margins in wealth, while Goldman Sachs Group Inc. rose as profit beat estimates. Boeing Co. sank on an analyst downgrade. Apple Inc. slipped as the US Supreme Court refused to consider its appeal in an antitrust suit challenging the App Store.
The first quarter of this year will be marked by the realization that it’s too early for the central banks to cut rates, according to Ipek Ozkardeskaya, a senior analyst at Swissquote.
“With today’s info in hand, the Fed is intent on cutting three times this year — and would only cut more if the economic situation deteriorated and the unemployment rate started heading towards 4.5-5%, I believe,” said Peter Boockvar, author of the Boock Report. That would be up from 3.7% in December.
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.”
Optimism over lower rates has spurred investors to up their exposure to US stocks to the highest in over two years, according to a Bank of America Corp. fund-manager survey. There is “record optimism on rate cuts” and 79% of survey respondents expect the global economy to experience either a soft or no landing in 2024, BofA’s team led by Michael Hartnett wrote in a note.
UBS Group AG is the latest bank to lift its outlook for US equities, ratcheting up its 2024 forecast for the S&P 500 Index by 6% on Tuesday, to 5,150, following the Fed’s dovish policy shift in December. The move comes roughly a month after the Swiss lender set its year-ahead call for the US equity benchmark at 4,850. RBC Capital Markets boosted its outlook last week, while Goldman Sachs did so in December, a month after setting it.
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.
“While markets may experience modest downside volatility through the results season after the strong rally in November and December, we think upside remains in US equities amid looser monetary policy and durable corporate profits,” said Solita Marcelli at UBS Global Wealth…
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