Stocks rise on hopes of Fed’s ‘past hawks’

© Reuters. FILE PHOTO: A Wall Street sign outside the New York Stock Exchange in New York City, U.S., October 2, 2020. REUTERS/Carlo Allegri

David Randall

NEW YORK (Reuters) – Bad news on Wall Street could once again be good news as supporters hope the Federal Reserve may not need to tighten policy as previously expected amid signs of slowing U.S. economic growth.

Home sales fall for third straight month, while retail giants such as Target Shares of Corp (NYSE:) and Walmart (NYSE:) Inc were volatile last week. The Atlanta Fed’s GDPNow estimate for second-quarter real GDP growth fell to 1.8% on May 25 from 2.4% the previous week.

Slowing economic growth raises the risk of weak corporate profits, theoretically paving the way for weaker share prices. Several Wall Street banks have warned in recent weeks that the likelihood of a U.S. recession is rising, along with the possibility of a low-growth, high-inflation environment known as stagflation.

In the short term, however, some investors believe the emerging slowdown could support the Fed’s pullback from the aggressive monetary policy tilt that has rattled investors and helped drive the cusp of a 20% decline, which many have dubbed For the bear market..

The index rose 6.6% for the week, snapping a seven-week losing streak, but is down about 13% so far this year. Weekly net inflows to U.S. stocks hit their highest level in 10 weeks, data from Bank of America Global Research showed on Thursday.

“Obviously everyone at the Fed is ready to raise rates by 50 basis points at the next two rate hike meetings. But after that, it’s not clear what they’ll do, if growth slows sharply, they’ll do it,” Columbia Threadneedle Investments Anwiti Bahuguna, senior portfolio manager and head of multi-asset strategy, said she has recently increased her equities allocation.

Bank of America strategists: Worries about the impact of a rate hike at a time when inflation may have peaked could mean the central bank will pause policy tightening in September, keeping its benchmark overnight rate at 1.75% to 2% if financial conditions deteriorate. Scope said in notes.

Expectations for a hawkish Fed have eased, with investors now pricing in a 35% chance that the Fed’s funds rate will be between 2.25% and 2.50% after its September meeting, down from a week earlier, data from the CME showed. top 50%.

The Fed has already raised rates by 75 basis points this year. Officials are grappling with how best to steer the economy toward low inflation without causing a recession or spiking unemployment, minutes from the central bank’s latest meeting showed.

Anders Persson, chief investment officer of global fixed income at Nuveen, said signs that growth may be slowing helped boost Treasury prices, a sign that investors are increasingly viewing bonds as safety rather than safety. Assets that may be at risk during periods of high inflation.

The yield on the benchmark 10-year Treasury note, which is inversely related to price, hit a six-week low of 2.706% on Thursday after surging to a high of 3.14% this month.

“The market is pricing in a slowdown,” but not a recession, which makes riskier parts of the fixed-income market like high-yield bonds more attractive, Persson said.

U.S. data on Friday also showed that price gains may be slowing. The personal consumption expenditures (PCE) price index rose 0.2%, the smallest gain since November 2020, after rising 0.9% in March.

In the long run, the Fed, which may be less hawkish, won’t necessarily give the green light to stock buyers. With inflation reaching the highest level in decades, there are growing concerns about the impending stagflation, a phenomenon that severely affected all asset classes during the supply shocks of the 1970s.

Among the warnings were hedge fund manager Bill Ackman, who sits on the Federal Reserve’s Financial Markets Investor Advisory Committee and who took to Twitter this week (NYSE: ) to urge the central bank to curb inflation by raising interest rates more aggressively.

Meanwhile, Citi’s global asset allocation team downgraded its U.S. equity allocation to “neutral” this week, saying “while a U.S. recession is not a base case for Citi’s economy, uncertainty is very high.”

However, some investors believe a turning point may be coming.

Esty Dwek, chief investment officer at FlowBank, is betting the central bank will start to see signs of slowing inflation and growth when policymakers hold their annual meeting in Jackson Hole, Wyoming.

“The Fed has passed its peak of hawkishness,” she said.

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