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Stock and Bond Markets at Risk as Fed Rate Cut Expectations Fizzle

By:Ilya Spivak

Stock and bond markets are at risk as economic data erodes Fed rate cut expectations. A report on U.S. consumer confidence is in focus next.

  • Hotter-than-expected U.S. PPI data spooked Wall Street and lifted Treasury yields.
  • U.S. consumer confidence data may push back on Fed rate cut outlook further.
  • If the priced-in policy view moves to -61 bps or higher, risk appetite may fizzle.

Two hotter-than-expected U.S. inflation data points were apparently a bridge too far for stock markets. Wall Street took in stride the overshoot on consumer price index (CPI) data released this week, but more of the same from the producer price index (PPI) was met with jeers.

The headline wholesale inflation rate printed at 1.6% year-on-year in February, marking a potent jump from the 1% recorded in the prior month. The outcome sailed well past economists’ forecasts penciling in 1.1% ahead of the release. Core PPI excluding food, energy and trade rose 2.8%, the highest since October.

The bellwether S&P 500 as well as the tech-tilted Nasdaq turned lower, though the small-cap Russell 2000 was the standout loser. It is on pace to close with a loss of nearly 2.5%. Treasury yields surged across maturities while rates-sensitive gold and the Japanese yen fell. Bitcoin lost 4.5%.

Fed rate cut expectations are diminishing

Perhaps most critically, the outlook for Federal Reserve monetary policy shifted to the least dovish setting in two weeks. Fed Funds futures now price in 67 basis points (bps) in cuts in 2024. That moves markers further away from the 80-bps baseline that the central bank established in December, and in the wrong direction for risk appetite.

Futures Implied 2024 Fed Outlook vs. S&P 500

From here, the spotlight turns to the closely watched measure of U.S. consumer confidence from the University of Michigan (UofM). The mood soured a bit in February as one-year inflation expectations ticked up from 2.9% to 3%. Incoming figures are expected to register broadly unchanged for March.

February’s U.S. retail sales data fell short of expectations. Receipts posted a monthly rise of 0.6%, trailing estimates anticipating 0.8%. January’s reading was also revised lower to a decline of -1.1% from -0.8%. Taken together with warmer CPI and PPI readings, this might foreshadow disappointment on UofM results.

Stocks and bonds at risk on consumer confidence report

If the survey shows sentiment continued to deteriorate while the inflation outlook ticked higher, the markets may reason that the argument for Fed easing has weakened further. As it stands, two 25 bps cuts are fully priced in and the probability of a third cut still stands at a better-than-even 67%.

Moving the priced-in outlook to -61 bps or higher would signal that markets have shifted to imply that two cuts are likelier than three. That would put the markets on the hawkish side of the Fed’s baseline. This might amount to a headwind for stocks and bonds alike, while yields and the U.S. dollar trek upward.

Univ. of Michigan US Consumer Confidence Survey
University of Michigan

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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