US Two-Year Yield Eyes 5% Before Powell’s Remarks: Markets Wrap

(Bloomberg) — The world’s biggest bond market remained under pressure, with traders sifting through a slew of remarks from Federal Reserve speakers on speculation that policymakers will be in no rush to cut rates.

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In the run-up to Jerome Powell’s speech, US two-year yields came closer to the 5% mark. The dollar extended its rally into a fifth straight session. Equities struggled after their worst back-to-back selloff in more than a year.

“Powell is likely to set the near-term market narrative,” said Chris Senyek at Wolfe Research. “The Fed Chair is always a wild card.”

To Krishna Guha at Evercore, Powell’s remarks are “higher stakes than normal” coming after hot economic data.

“We think he will try to combine a reassuring message on the overall economics of disinflation with an emphasis that the Fed will not brush recent data under the carpet,” Guha noted.

The S&P 500 hovered near 5,050. Bank of America Corp. sank as charge-off for soured loans topped estimates, while Morgan Stanley climbed as traders delivered solid revenue. UnitedHealth Group Inc. led gains in the Dow Jones Industrial Average after its results.

Treasury 10-year yields hit a fresh high for 2024. The greenback headed for its biggest five-day gain in over a year.

In light of recent economic developments in the US, Powell’s tone will be key, according to Win Thin and Elias Haddad at Brown Brothers Harriman.

“There is always a significant risk that Powell makes a dovish slip in his comments,” they said. “However, we expect him to maintain a more hawkish tone. The Fed needs and wants the market to do the tightening for them. That means higher yields, which require a more hawkish Fed tone.”

Policymakers around the world are struggling to confront a surging greenback and lofty US interest rates, according to Mohamed El-Erian.

“Authorities are a little bit frozen around the world as to how do you react to a generalized dollar strengthening?” El-Erian, the president of Queens’ College, Cambridge and a Bloomberg Opinion columnist, told Bloomberg Television Tuesday. “How do you react to a generalized increase in interest rates in the US?”

Fed Vice Chair Philip Jefferson said Tuesday that while there has been considerable progress in lowering inflation, the Fed’s task of sustainably restoring 2% inflation is “not yet done.” His San Francisco counterpart Mary Daly reiterated late Monday there’s no urgency to adjust interest rates, pointing to solid economic growth, a strong labor market and still-elevated inflation.

After starting the year by pricing in as many as six rate cuts in 2024, or 1.5 percentage points of easing, traders are now doubtful there will even be a half point of reductions. Most Wall Street economists have dialed back forecasts as well, setting up a dour scenario for US yields including a possible repeat of maturities breaching 5% as they did last October.

Amid all the anxiety, the widely watched MOVE index, an options-based measure of expected volatility in Treasuries, spiked to the highest since January.

State Street Global Advisors is standing by a contrarian call for the Fed to cut interest rate as soon as June despite a string of hot economic data that has spurred most traders to push back bets to later in the year.

The asset manager remains convinced the central bank will start monetary easing well before the US presidential election in November to avoid being seen influencing the result, according to Chief Investment Officer Lori Heinel. The inflation backdrop still supports this move given policy works with a long lag and the quality of recent data prints has been low, she said.

Exposure to stocks is now so high that any weakness is likely to set off a bigger slump once investors start to cut back on their long positions, according to top Wall Street strategists.

There are $52 billion of long positions on the S&P 500 and 88% of them are in a loss, a situation that Citigroup strategist Chris Montagu sees as a risk for the market.

A BofA’ survey showed that investors have raised their allocation to equities to net 34% overweight — the biggest since January 2022 — in a poll conducted from April 5-11 among 224 participants with $638 billion in assets under management.

A separate note showed BofA clients were net sellers of US equities for a third consecutive week.

Clients pulled a net $800 million from US stocks in the five-day period through April 12 as the S&P 500 Index slumped for the week, quantitative strategists led by Jill Carey Hall said Tuesday in a note.

“A stock-market correction is unfolding right now triggered by Middle East tensions, rising bond yields and worries about delayed Fed rate cuts,” said James Demmert at Main Street Research. “Stocks have been due for a pullback for quite some time.”

BlackRock Inc.’s Robert Kapito says the stock market is poised to benefit as investors deploy their outsized holdings of cash.

There’s almost $9 trillion sitting in money market funds and the same amount in cash alternatives at banks, Kapito, president of the world’s largest asset manager, said at the Asia Pacific Financial and Innovation Symposium in Melbourne on Tuesday.

“Rising bond yields are a sign that the global economy and corporate profits are strong and resilient,” said Demmert at Main Street Research. “While this economic and corporate strength may result in fewer than expected or even no rate cuts for the foreseeable future, that isn’t something that will ruin this new bull market.”

“In the early phase of a new business cycle, it’s earnings — not the Fed – that drive stocks. Earnings have been far better than expected and we envision a similar outcome as earnings season is once again in full swing,” he concluded.

Corporate Highlights:

Morgan Stanley’s traders delivered first-quarter revenue that exceeded expectations as its wealth management juggernaut also got back on track — both handing a key win for its new leader Ted Pick.
Bank of America Corp. reported elevated expenses and charge-offs for soured loans that were higher than analysts expected, failing to satisfy investors with a gain in its trading business.
PNC Financial Services Group Inc. missed estimates for net interest income in the first quarter, a sign that the Pittsburgh-based lender has continued to struggle with muted loan growth.
The Bank of New York Mellon Corp. reported first-quarter revenue that topped estimates as the oldest US lender benefited from higher market values and increased client activity.
UnitedHealth Group Inc. beat Wall Street’s profit expectations and affirmed its outlook for the year, despite the costs associated with a cyberattack on one of its subsidiaries that has roiled the health-care industry.
Johnson & Johnson’s first-quarter profit beat estimates as the health giant’s drug sales came in higher than Wall Street analysts expected.

Key events this week:

Eurozone CPI, Wednesday
Fed issues its Beige Book, Wednesday
Cleveland Fed President Loretta Mester speaks, Wednesday
Fed Governor Michelle Bowman speaks, Wednesday
BOE Governor Andrew Bailey speaks, Wednesday
Taiwan Semiconductor earnings, Thursday
US Conf. Board leading index, existing home sales, initial jobless claims, Thursday
Fed Governor Michelle Bowman speaks, Thursday
New York Fed President John Williams speaks, Thursday
Atlanta Fed President Raphael Bostic speaks, Thursday
BOE Deputy Governor Dave Ramsden and ECB Governing Council member Joachim Nagel speak, Friday
Chicago Fed President Austan Goolsbee speaks, Friday