Bond Markets React to Strong Economic Data and Fed's Rate Hike Stance

📝 SUMMARY: Wall Street witnessed a notable shift in the bond and stock markets, driven by robust economic data and Federal Reserve commentary, indicating a prolonged battle against inflation. The release of strong economic figures, particularly the Institute for Supply Management’s services gauge hitting a four-month high, led to a downturn in bond prices. This was compounded by Federal Reserve Chair Jerome Powell's remarks reiterating that an interest rate cut in March is unlikely, challenging the market's previous optimism about potential rate reductions.

US 10-year Treasury yields rose sharply by 14 basis points to 4.16%, and two-year note yields approached 4.5%. Market expectations for a March rate move diminished significantly, and the likelihood of a May cut also decreased. In response, the US dollar strengthened, reaching its highest level since November.

In equities, the S&P 500 ($.INX) recovered from session lows, with companies like Nvidia Corp. ($NVDA) leading gains in the technology sector. Notably, New York Community Bancorp's ($NYCB) unexpected decision to cut dividends and conserve cash added to the market dynamics, although this was viewed as an isolated event rather than a systemic risk.

Federal Reserve officials, including Powell and regional bank presidents Neel Kashkari and Austan Goolsbee, emphasized the need for more data before considering policy easing. Their comments suggest a cautious approach to monetary policy, prioritizing the containment of inflation over immediate rate cuts.

The ISM services index's rise to 53.4 last month, remaining above the expansion-indicating level of 50 for a year, along with a jump in the prices paid metric, highlighted ongoing inflationary pressures. These developments have led strategists like Dominic Bunning at HSBC ($HSBA) to maintain a bullish outlook on the US dollar, expecting the Fed's rate decisions to be more influenced by upside risks.

🔍 SOURCE: https://www.bloomberg.com/news/articles/2024-02-04/treasury-selloff-hits-asia-on-pared-rate-cut-bets-markets-wrap