Stocks rose as bond yields fell, with traders optimistic about Federal Reserve rate cuts after Chair Jerome Powell cited signals that the U.S. is back on a disinflationary path. This article delves into the market movements and the implications of potential rate cuts by the Fed.
Market Performance and Fed Rate Cut Signals
The S&P 500 rallied towards new all-time highs, with the index hovering near 5,500. Tesla Inc. (NASDAQ: TSLA) led the gains among megacaps, climbing 9% as its deliveries beat estimates. The Nasdaq 100 also climbed almost 1%, approaching 20,000. Treasury 10-year yields retreated from the 4.5% mark as the swap market priced in nearly two rate cuts for 2024.
Lori Calvasina at RBC Capital Markets raised her year-end target for the S&P 500 to 5,700 from 5,300, predicting that economic strength will outweigh market risks. “Our suspicion is that 2024’s economy will end up being strong enough to justify a strong move in the S&P 500 for the year as a whole,” she said.
Job Market Data and Fed Insights
Data released Tuesday showed an unexpected rise in job openings, interrupting a trend that had suggested a cooling labor market. Powell acknowledged a “substantial” move toward better balance between the supply of and demand for workers, describing the job market as strong but appropriately cooling off. The increase in job openings highlights underlying resilience in the labor market, suggesting that demand for workers remains robust despite broader economic concerns.
Krishna Guha at Evercore noted Powell’s upbeat comments on inflation progress, which could support a rate cut in September. This unexpected data injects a note of optimism, indicating that the labor market may not be weakening as quickly as previously thought.
Historical Market Performance and Future Projections
After a slow start to the year, the S&P 500 has notched 31 all-time closing highs in the January-June period of 2024, according to Bloomberg data. This performance, driven by American technology giants, evokes comparisons to prior boom-and-bust cycles on Wall Street, though current parallels to the dot-com era remain exaggerated.
Deutsche Bank AG strategists expect U.S. earnings to rise by an above-average 13% for the second quarter, driven by megacap growth and tech stocks. The team led by Binky Chadha anticipates a subdued market reaction, as stocks have already rallied in anticipation of the earnings season.
Economic Data and Investor Sentiment
Wall Street is gearing up for significant economic data releases on Wednesday, ahead of the early market close and the Thursday holiday. The all-important U.S. payrolls report due on Friday is expected to show employers added about 195,000 payrolls in June, with the unemployment rate holding at 4%.
Jose Torres at Interactive Brokers highlighted the importance of the next three months of inflation reports for both investor sentiment and the Fed’s timing for potential rate cuts. “June will likely show continued disinflation, but the potential results for July and August are less clear,” he noted, raising questions about how many months of favorable data are needed before the Fed moves.
Conclusion
The recent rally in U.S. equities and the drop in bond yields reflect traders’ optimism about potential Federal Reserve rate cuts. As economic data continues to unfold, particularly job market and inflation reports, the Fed’s decisions on rate cuts will be closely watched, influencing market performance and investor sentiment.
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