(Bloomberg) — Wall Street traders sent bonds up and stocks down after the latest round of economic data signaled a slowdown in momentum.
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Just 24 hours before the release of the Federal Reserve’s preferred price gauge, data showed the US grew at softer pace — as both spending and inflation were marked down. Economic cooling means officials could have room to cut rates this year. But that might also be a concern for consumption and, therefore, corporate profits.
“The economic data today are a double-edged sword,” said Chris Zaccarelli at Independent Advisor Alliance.
Read: Traders Say Disruptions Minimal During S&P 500 Pricing Glitch
Traders had issues with live pricing for the S&P 500 Index and Dow Jones Industrial Average for more than an hour on Thursday morning in New York. Individual stocks and exchange-traded funds continued to print normally throughout. That, along with trading of futures contracts, helped traders navigate the disruption.
“At the time it was out, I wasn’t worried,” said Mike Zigmont at Harvest Volatility Management. “Futures were still trading, so you could use them to get the SPX level. Most traders that know enough, didn’t care.”
The S&P 500 dropped to around 5,250, led by losses in tech. Salesforce Inc. tumbled 21% after a weak outlook. Dell Technologies Inc. will report earnings after the close. Treasury two-year yields dropped five basis points to 4.92%. The dollar fell.
Read: The Fed Thinks It’s Fighting Inflation. Think Again: Bill Dudley
Fed Bank of New York President John Williams said he expects inflation to continue falling in the second half of this year, adding that elevated borrowing costs are restraining the economy.
Zaccarelli at Independent Advisor Alliance says he’s long been of the belief that the economy matters more than lower rates for the sake of propping up stock prices.
“Of course, they are interrelated because all things being equal, the economy is likely to stay out of recession if interest rates are lower than they are now, but ultimately it is the economic expansion – and continuation of corporate profits – that are the most important thing in the medium and long term,” he noted.
His base case this year is for inflation to remain relatively sticky and for the Fed to stay on the sidelines for most – if not all – of 2024, but also for the economy to continue to expand and for corporate profits to continue to grow.
“So the stock market should remain in a bull market, not withstanding the occasional pullback along the way,” he noted.
Gross domestic product rose 1.3% annualized in the first three months of the year, below the previous estimate of 1.6%, Bureau of Economic Analysis figures published Thursday showed. The economy’s main growth engine — personal spending — advanced 2.0%, versus the previous estimate of 2.5%.
“Sum it all up and you have an economy that has come off the boil – and needed to – but remains on track for continued growth,” said Jim Baird at Plante Moran Financial Advisors. “Inflation remains a primary challenge to consumers and policymakers – one that is still seemingly poised to be resolved, particularly as wage growth and housing inflation normalize.”
The question is one of timing for policymakers who need to see evidence that inflation gauges have resumed their descent toward 2% and the risk of a second wind catching the inflation sail has dissipated, Baird added.
“It was a bond-friendly round of data,” said Ian Lyngen at BMO Capital Markets. “We’re looking for a drift lower in rates throughout the day as investors square positions ahead of Friday’s core-PCE update and month-end.”
The Fed’s first-line inflation gauge is about to show some modest relief from stubborn price pressures, corroborating central bankers’ prudence about the timing of interest-rate cuts.
“The name of the game is still inflation and interest rates,” said Chris Larkin at E*Trade from Morgan Stanley. “Stay tuned for tomorrow’s PCE price index release, because it could dominate market sentiment until next Friday’s jobs report.”
Signs that the economy may be cooling enough to pave the way for rate cuts, coupled with strong corporate profits, have proven to be good for stocks.
That’s according to an analysis by Bank of America Corp.’s strategists, who crunched the data going back to 1950 to determine that prior quarters of declining economic growth and rising corporate earnings saw the S&P 500 advance 3.6%, on average.
That’s higher than a 2% mean gain seen when both corporate profits and the US gross domestic product saw a boost.
Corporate Highlights:
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Kohl’s Corp. reported first-quarter sales and earnings that fell short of estimates and lowered its guidance, as demand for apparel and home goods remained weak.
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Best Buy Co. reported better-than-expected profitability in the first quarter, even as sales woes deepened and consumers remained on the sidelines with their electronics purchases.
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Bank of America Corp.’s sales and trading team is on track to report second-quarter revenue growth in the low single digits, with investment banking up 10% to 15% from a year earlier, Chief Executive Officer Brian Moynihan said.
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HP Inc. reported quarterly revenue that topped analysts’ estimates, including the first increase in PC sales in two years, an optimistic signal for a long-awaited rebound in the market.
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Birkenstock Holding Plc posted robust earnings and raised its forecast for the year as consumers snapped up its high-end sandals and clogs. The shares rose the most ever.
Key events this week:
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Japan unemployment, Tokyo CPI, industrial production, retail sales, Friday
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China official manufacturing and non-manufacturing PMI, Friday
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Eurozone CPI, Friday
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US consumer income, spending, PCE deflator, Friday
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Fed’s Raphael Bostic speak, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.3% as of 2:53 p.m. New York time
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The Nasdaq 100 fell 0.7%
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The Dow Jones Industrial Average fell 0.8%
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The MSCI World Index fell 0.1%
Currencies
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The Bloomberg Dollar Spot Index fell 0.3%
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The euro rose 0.4% to $1.0839
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The British pound rose 0.3% to $1.2739
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The Japanese yen rose 0.5% to 156.81 per dollar
Cryptocurrencies
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Bitcoin rose 2.8% to $69,288.29
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Ether rose 1.7% to $3,813.69
Bonds
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The yield on 10-year Treasuries declined six basis points to 4.55%
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Germany’s 10-year yield declined four basis points to 2.65%
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Britain’s 10-year yield declined five basis points to 4.35%
Commodities
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West Texas Intermediate crude fell 1.5% to $78.02 a barrel
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Spot gold rose 0.2% to $2,342.81 an ounce
This story was produced with the assistance of Bloomberg Automation.
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