U.S. stocks rose after a string of unexpectedly strong economic data undermined talk of a looming recession.
On Tuesday, the sell-off of U.S. Treasury bonds continued, pushing yields to continue to rise collectively, with 2-year and 5-year U.S. Treasury yields both rising by more than 10 basis points on the day.
The yield on the 10-year U.S. Treasury bond broke through 2.90% and approached 3% during the session. It refreshed the high since December 2018 for three consecutive trading days and closed at 2.94%, up about 9 basis points on the day. The 30-year U.S. Treasury yield rose above 3% for the first time since 2019.
The U.S. stock market, which had been falling for several days, rebounded strongly. The S&P and Nasdaq rose 1.6% and 2.2% respectively, breaking away from their troughs in more than a month. All sectors except energy rose. Several sectors rose by more than 1%, led by the consumer discretionary sector. Amazon’s sector, the blue-chip tech leader, rose nearly 3 percent.
Bond market expectations for sharp monetary tightening by the Fed further increase
The sell-off in U.S. Treasuries came after comments from Fed officials boosted expectations that the central bank will act aggressively to curb inflation.
Chicago Fed President Charles Evans said on Tuesday that the central bank may raise interest rates to between 2.25% and 2.5% by the end of this year, and if inflation persists, the central bank may need to raise interest rates further. St. Louis Fed President James Bullard also said Tuesday that a sharp 0.75 percentage point rate hike is likely sometime this year.
The real yield on the 10-year Treasury note entered positive territory on Tuesday for the first time since March 2020, data from electronic trading platform operator Tradeweb showed.
The spike in real yields reflects how much the Fed has been able to tighten financial conditions, so as real rates soar, so do nominal rates.
Strong economic data undermines talk of a looming recession
On Tuesday, the IMF cut its forecast for global economic growth this year to 3.6 percent, down 0.8 percentage points from its January forecast, but U.S. stocks rose strongly, recording their biggest one-day gain in more than a month.
The factors that investors are worried about haven’t really changed – inflation, the Russian-Ukrainian crisis, the pandemic, and a broad rise in U.S. Treasury yields, both real and nominal, on Tuesday weighed on U.S. stocks, especially in riskier areas.
But some investor psychology played a role.
U.S. stocks rose after a string of unexpectedly strong economic data undermined talk of a looming recession.
U.S. stock market housing starts surged to the highest level since 2006 in March, indicating strength in the real estate sector, which is highly sensitive to changes in interest rates.
Other recent reports have also brought comfort to the bulls. The number of Americans filing for unemployment benefits has fallen in recent weeks, a sign that hiring remains strong, with a University of Michigan survey of consumer sentiment rising to a three-month high in early April.
Meanwhile, high-frequency data shows that consumers are again going out in droves to shop and dine.
High-frequency metrics, which became popular during the pandemic as analysts try to understand things like consumer movements during lockdowns, are now trending upwards as well.
The return-to-work barometer has risen to its highest level since March 2020, according to Bloomberg, while TSA passenger throughput figures and metrics measuring reservations made through restaurant booking app OpenTable have also improved.
On Tuesday, companies that benefited from the reopening of the economy outperformed those that did well while people were stuck at home. Shares of e-commerce platform Etsy Inc. surged 4.4%, while gaming company Penn National Gaming Inc., Wynn Resorts Ltd. and used-car dealer CarMax Inc. all rose more than 5%.
Mark Haefele of UBS Global Wealth Management said that despite the increased risks to growth, his base case is that a recession will be avoided.
First-quarter corporate earnings look set to be positive, he said, adding that investors should be looking for long-term value in the stock. ” Times of heightened market volatility and uncertainty tend to present attractive long-term entry points for structural growth areas,” the chief investment officer wrote. He sees areas such as 5G, automation, robotics and smart mobility as very important is attractive.
JPMorgan’s Marko Kolanovic said runaway commodity prices, out-of-sync global central bank policy and the recent decline in equity markets have created unique buying opportunities for growth and value stocks. Sentiment and positioning remain too pessimistic, the strategist said.
However, analysts pointed out that it is not appropriate to read too much into the one-day trend, and worries about economic growth still plague investors and economists.
Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, told Bloomberg:
“When the path of growth, especially growth and interest rates going forward, is so uncertain, the day-to-day work of the Fed and investors becomes more data-dependent than usual. So if positive data drives stock prices, then when data disappoints , we may go in the opposite direction. ”
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