Back Towards The Middle
Stocks in the US were swinging near the flatline in afternoon trading, with all three major averages hovering at record highs.
Earlier, the Dow Jones briefly reached an all-time high of 40,051, supported by expectations of interest rate cuts.
The materials and energy sectors were the biggest laggards, while consumer discretionary outperformed, driven by a 7% jump in Walmart shares after the retailer's quarterly results exceeded expectations.
In contrast, Deere & Co fell by over 4% after cutting this year’s guidance, and Meta lost over 1%, weighing against the stronger momentum for tech stocks.
Cisco also declined by 2.8% despite reporting upbeat quarterly results.
The 10-year yield broke below is recent trendline.
Let's take a look at how yields rose from 3.81% to 4.74% over just the past three months.Â
In mid-January the market was pricing in six quarter-point rate cuts for the year, with a chance of a seventh.
The Fed started pushing back against that sentiment by late January, and Jerome Powell curbed the enthusiasm about the rate outlook in the January Fed meeting. That started this pendulum swing in the rate outlook, from one extreme to another.
This trend higher in market rates (in the above chart) was then strengthened by rumours that the Bank of Japan was preparing to exit emergency level policies - a signal that inflation was even sustaining in Japan.
The trendline held again on a hot U.S. inflation report on Good Friday.
And by mid-April the pendulum on the rate outlook had swung from expectations of as many as seven quarter-point rate cuts this year, to maybe none/zero.
With that, fittingly, the tide turned on the rising trend in yields following Jerome Powell's clearly dovish message after the Fed's May meeting.
The trendline broke, with this week’s CPI report, where it showed a decline in year-over-year inflation, and weak inflation if we exclude the effects of auto insurance and owner's equivalent rent.
So now we have the pendulum on rate expectations moving back towards the middle in the U.S. We have expectations for rate cuts coming from the eurozone and UK next month. And the Bank of Japan's plan to tighten policy has already hit a road bump, after the economy contracted in the first quarter.