Bond Yields Tumble as Traders Dial Back Fed Wagers: Markets Wrap

(Bloomberg) -- Treasury yields slumped as inflation showed signs of easing, which could make the case for the Federal Reserve to slow its pace of rate hikes to prevent a harsher economic downturn. Stocks saw mild gains.

Wall Street looked past its initial disappointment with an in-line consumer price index to focus on the idea that aggressive monetary policy may be gradually achieving its desired results. That perception is visible in the swap market, which is showing less than 50 basis points of tightening priced in for the next two central bank gatherings: a small chance of no move at all in March.

None of that means, of course, the Fed will soon declare victory over inflation. No. Resilient consumer demand, particularly for services, combined with a tight labor market is a significant threat to prices. But the CPI figures overall show things seem to be going in the right direction, paving the way for the Fed to downshift to a quarter-point hike at its next meeting.

“Today’s inflation print is another sign that the Fed’s prescription for bringing down high inflation is working,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “The data set was in line with expectations, and a continuation of this trend should bring the Fed’s rate hike expectations down as we continue to get closer to the end of the Fed hiking cycle.”

To Krishna Guha at Evercore ISI, the CPI report is indeed consistent with the Fed slowing the pace of rate hikes in February. However, he thinks the central bank would try to make it a “hawkish 25.”

“The nostalgia for a pivot is so premature,” said Solomon Tadesse, head of North American equity quant strategies at Societe Generale. “Even if the Fed stops hiking, it will keep rates high for a longer time.”

That would possibly be in line with what a raft of US officials has been recently telegraphing. In other words, some of them have signaled openness to making a 25 basis-point rate increase right at their next meeting, while also stressing the Fed still has more work to do to tame prices — and not anticipating any rate cuts this year.

Fed Bank of Philadelphia President Patrick Harker said the central bank should tighten in quarter-point increments “going forward,” but reiterated that officials expect to hold rates at higher levels to give them time to travel through the economy. His Richmond counterpart Thomas Barkin noted inflation has been slowing down and the Fed doesn’t need to raise rates as aggressively as it did last year.

However, Barkin added that while inflation is slowing, it’s still too high.

Read: Fed’s Bullard Favors Getting Rates Above 5% ‘Soon as Possible’

Key events this week:

• China trade, Friday
• US University of Michigan consumer sentiment, Friday
• Citigroup, JPMorgan, Wells Fargo report earnings, Friday

This week’s MLIVE Pulse Survey:

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.3% as of 4 p.m. New York time
• The Nasdaq 100 rose 0.5%
• The Dow Jones Industrial Average rose 0.6%
• The MSCI World index rose 0.8%

Currencies

• The Bloomberg Dollar Spot Index fell 0.9%
• The euro rose 0.9% to $1.0852
• The British pound rose 0.6% to $1.2216
• The Japanese yen rose 2.4% to 129.21 per dollar

Cryptocurrencies

• Bitcoin rose 8.7% to $19,083.2
• Ether rose 6.9% to $1,436.26

Bonds

• The yield on 10-year Treasuries declined 11 basis points to 3.43%
• Germany’s 10-year yield declined five basis points to 2.16%
• Britain’s 10-year yield declined eight basis points to 3.33%

Commodities

• West Texas Intermediate crude rose 1% to $78.22 a barrel
• Gold futures rose 1.2% to $1,901.70 an ounce

This story was produced with the assistance of Bloomberg Automation.

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