U.S. stocks climb as yields fall to two-week low; copper tumbles

By Caroline Valetkevitch

NEW YORK (Reuters) – Stocks in global markets rose on Thursday as U.S. Treasury yields fell to two-week lows, while copper was at 16-month lows as investors worried about a possible global economic slowdown.

The Nasdaq led the way higher on Wall Street, rising more than 1.6%. Technology shares including Apple Inc and defensive shares gave the S&P 500 its biggest boost as investors continued to worry about a potential recession.

Investors have been weighing the risk of hefty interest rate rises tipping economies into recession.

Federal Reserve Chairman Jerome Powell testified before Congress for a second day, a day after saying the Fed is committed to cutting inflation at all costs, and acknowledged a recession was “certainly a possibility.”

“What we’re seeing here is a (stock) market trying to absorb the Fed’s tightening and basically trying to put in a low in a bear market,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

“We have yields that are coming down, and so that’s helping stocks,” he said. “For now, the market has probably discounted somewhat of a mild recession.”

Gauges of factory activity released on Thursday in Japan, Britain, the euro zone and United States all softened in June, with U.S. producers reporting the first outright drop in new orders in two years.

Manufacturing growth is slowing worldwide partly because China’s COVID-19 curbs and Russia’s invasion of Ukraine have disrupted supply chains and added to inflation problems.

The Dow Jones Industrial Average rose 194.23 points, or 0.64%, to 30,677.36, the S&P 500 gained 35.84 points, or 0.95%, to 3,795.73 and the Nasdaq Composite added 179.11 points, or 1.62%, to 11,232.19.

The pan-European STOXX 600 index lost 0.82% and MSCI’s gauge of stocks across the globe gained 0.43%.

In the U.S. bond market, yields fell, partly on a growing belief that yields may have topped for the near term even if inflation stays high.

Yields have dropped from their highest level in more than a decade, reached before last week’s Fed meeting, when the U.S. central bank hiked rates by 75 basis points, the biggest increase since 1994.

Benchmark U.S. 10-year yields fell to 3.005%, before rebounding to 3.070%. They have dropped from 3.498% on June 14, the highest since April 2011.

Copper prices slumped as rising interest rates and weak economic data fed worries about demand.

Copper on the London Metal Exchange (LME) hit its lowest level since February 2021.

In the foreign exchange market, the euro slid across the board following the weaker-than-expected German and French PMI data.

Against the dollar, the euro declined 0.5% to $1.0509. It earlier declined below a key $1.05 level for the third time this week. The euro also declined 1.4% versus the Japanese currency to 141.85 yen.

Oil prices ended lower as investors weighed the risk of a recession. Brent crude futures fell $1.69 to settle at $110.05 a barrel, while U.S. West Texas Intermediate (WTI) crude futures dropped $1.92 to settle at $104.27.

(Reporting by Caroline Valetkevitch in New York; Additional reporting by Gertrude Chavez-Dreyfuss and Karen Brettell in New York, and Huw Jones in London; Editing by David Gregorio and Matthew Lewis)

U.S. stocks jump 2% after recent selloff; yen drops vs dollar

By Caroline Valetkevitch

NEW YORK (Reuters) – Stocks on global indexes rose sharply on Tuesday, with major U.S. stock indexes each ending up more than 2% following a recent selloff, while the Japanese yen fell against the U.S. dollar to its lowest level since October 1998.

Wall Street climbed as participants returned from a long weekend, with investors buying up shares of megacap growth and energy companies hit last week by global economic worries.

Energy shares climbed along with oil prices. Oil gained on high summer fuel demand.

“After back-to-back weeks of 5% declines, you’ve pushed the ball under the water far enough now that we’re getting a bounce,” said Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago.

But, Nolte said, “interest rates are still going higher. Oil is still going higher.”

Expectations of interest rate hikes from major central banks and worries about a global recession have kept investors on edge. Central banks are expected to tighten policy to combat high inflation.

The Dow Jones Industrial Average rose 641.47 points, or 2.15%, to 30,530.25, the S&P 500 gained 89.95 points, or 2.45%, to 3,764.79 and the Nasdaq Composite added 270.95 points, or 2.51%, to 11,069.30.

The pan-European STOXX 600 index rose 0.35% and MSCI’s gauge of stocks across the globe gained 1.83%.

U.S. Treasury yields were higher as the risk-off mode that weighed on U.S. markets last week took a breather.

Benchmark 10-year yields were at 3.305%, up from their 3.239% close at the end of last week.

All eyes are now on Fed Chair Jerome Powell’s testimony to the Senate Banking Committee on Wednesday for clues on rates.

Goldman Sachs has said it now thinks there is a 30% chance of the U.S. economy tipping into a recession over the next year, up from its previous forecast of 15%.

In the foreign exchange market, the Japanese yen plunged against the U.S. dollar to 136.330 per dollar.

Japanese Prime Minister Fumio Kishida said the central bank should maintain its current ultra-loose monetary policy. This makes it an outlier among other major central banks.

Brent crude futures rose 52 cents, or 0.5%, to settle at $114.65 a barrel. The U.S. West Texas Intermediate (WTI) crude contract for July expired on Tuesday, closing at $110.65, with a gain of $1.09, or 1%. The more active August contract was up $1.53 at $109.52.

Spot gold dropped 0.3% to $1,832.27 an ounce.

(Additional reporting by Elizabeth Howcroft in London; also by Devik Jain and Anisha Sircar; Editing by Louise Heavens, Chizu Nomiyama, Will Dunham and Mark Heinrich)

Explainer-How do you define a recession? Let us count the ways

WASHINGTON (Reuters) – Whether the United States, the world’s largest economy, will slip into a recession is a growing concern for chief executives, the Federal Reserve, and the administration of President Joe Biden.

But defining what a recession is, and predicting when it will happen, is not straight-forward.

WHAT IS A RECESSION?

A recession is often defined as two consecutive quarters where the economy shrinks instead of grows, but with plenty of caveats.

The COVID-19 pandemic recession only lasted two months, for example, the shortest cycle on record.

Graphic: The COVID-19 recession and high frequency economic indicators – https://graphics.reuters.com/HEALTH-CORONAVIRUS/ECONOMICS/yxmpjozjyvr/index.html

WHO DETERMINES RECESSION?

In the United States the official call is made by a panel of economists convened by the National Bureau of Economic Research, sometimes as much as a year or more after the fact.

The private non-profit research group defines https://www.nber.org/business-cycle-dating-procedure-frequently-asked-questions#:~:text=A%3A%20The%20NBER’s%20traditional%20definition,more%20than%20a%20few%20months recession as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

While each of three criteria – depth, diffusion, and duration — “needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another,” the group says.

WHAT IS THE SAHM RULE?

There are other approaches to calling a recession, including the employment-based Sahm rule, named after former Fed economist Claudia Sahm, who created it to flag the onset of recession more quickly than official arbiters do.

The rule states when the 3-month rolling average of the unemployment rate rises a half a percentage point from its low, the economy has entered a recession.

WHAT IS A ‘SHALLOW RECESSION?’

Recessions come in many shapes. They can be deep but brief, like the pandemic recession which lasted two months but deleted 22 million jobs and sent the unemployment rate briefly to 14.7%.

They can be deep and scarring, like the Great Recession or the Depression, taking a decade or longer for the labor market to revive.

Economists and analysts have recently flagged the possibility that the United States is headed into a “shallow recession,” one in which the economy contracts only marginally, and for a limited time.

Graphic: US job breakdown during the COVID recession – https://graphics.reuters.com/USA-JOBS-UNEMPLOYMENT/010021ZP4YT/index.html

WHAT IS A GROWTH RECESSION? Another idea being discussed by some economists and analysts is the notion of a “growth recession,” in which economic growth slows below the U.S. long-term growth trend of 1.5 to 2 percentage points per year, but does not contract, while unemployment increases. This is the scenario mapped out by some Fed policymakers in their forecasts this week.

WHAT’S THE LINK BETWEEN INVERTED YIELD CURVE AND RECESSION?

When the market rate for short-term borrowing exceeds that for a longer-term loan, it is known as an inverted yield curve, and seen as a harbinger of a recession.

Historically at least some part of the yield curve has inverted before every recent recession, and alarm bells started ringing when that happened on June 13.

Research from the Federal Reserve argues that the most widely followed yield-curve measure, the gap between yields on the two-year and the 10-year Treasury notes, doesn’t actually predict https://www.federalreserve.gov/econres/notes/feds-notes/dont-fear-the-yield-curve-reprise-20220325.htm much of anything; a better gauge is the gap between three-month and 18-month rates, which has not inverted.

WHAT IS THE BEAR MARKET LINK TO RECESSION?

The recent steep stock sell-off has also set off alarms. Nine of 12 bear markets, or drops of more than 20%, that have occurred since 1948 have been accompanied by recessions, according to investment research firm CFRA.

(Reporting by Ann Saphir and Howard Schneider; Editing by Heather Timmons and Nick Zieminski)

Fed risk drubs stocks; dollar, bond yields soar

By Koh Gui Qing

NEW YORK (Reuters) – World stocks fell for a second day in a row on Tuesday while government bond yields and the U.S. dollar clung to multi-year highs, as surging inflation led investors to brace for what could be the largest U.S. interest rate hike in 28 years this week.

Surprisingly strong U.S. inflation data released Friday has fueled bets that the Federal Reserve must tighten monetary policy more aggressively to tame soaring prices. Fears that a steady series of rate rises could cause a recession walloped global equities on Monday.

Investors are betting with near certainty that the Fed will announce a 75-basis-point rate increase – the largest since November 1994 – at the end of its two-day policy meeting on Wednesday. It would be this year’s third rate increase following two 50-basis-point hikes.

“A 75-basis-point increase is more consistent with the Fed’s prior desire to ‘expeditiously’ raise rates to neutral,” Goldman Sachs analysts said in a note to clients on Tuesday, adding that “a restrictive policy stance is necessary to tame inflation.”

The analysts said they expect the Fed to raise rates by another 75 basis points in July, and predict that higher rates will likely bring on a recession in mid-2023.

Recession concerns and uncertainty around the outlook for rates weighed on stocks. The Dow Jones Industrial Average dropped 0.5% to a 16-1/2-month low, and the S&P 500 slipped 0.38%. The Nasdaq Composite bucked the trend and managed to eke out gains of 0.18%.

The S&P 500 tumbled into bear market territory on Monday after shedding more than 20% since a record close on Jan. 3.

The index now trades at a more attractive valuation of about 17 times its forward price-to-earnings ratio, according to data provider Datastream. That is roughly in line with its 10-year ratio average, and compares with a reading of more than 20 before the market correction.

MSCI’s gauge of stocks around the world dropped 0.65% to levels last seen in November 2020, while a pan-European equity index slumped 1.26% to March 2020 lows.

Underscoring rising U.S. rate expectations, two-year Treasury yields rose to 3.4560%, the highest since November 2007, while 10-year Treasury yields struck an 11-year high of 3.4980%. [US/]

Markets now see the Fed’s rate hike cycle peaking around 4%, a whopping 100 basis points above the 3% last month.

Euro zone government bond yields also hit multi-year highs, as spreads between core and periphery widened amid concerns about faster policy tightening by central banks. [GVD/EUR]

Investors’ repricing of higher rates has pummeled assets that benefited from rock-bottom interest rates, including stocks, crypto, junk-rated bonds and emerging markets.

“Quite simply, when we see monetary tightening the order of what we are seeing globally, something is going to break,” said Timothy Graf, head of EMEA macro strategy at State Street.

“Stock markets are reflecting the reality of the first-order effect of tighter financial conditions,” Graf said, predicting more pain with U.S. stock valuations still above COVID-era lows.

“I think there are other shoes to drop,” he said.

MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.59% lower, tracking Wall Street’s losses, while Japan’s Nikkei lost 1.32%.

Crypto markets, where bitcoin and ether hovered near 18-month lows, have also been drubbed by interest rate expectations and crypto lender Celsius Network’s decision to freeze withdrawals.

Bitcoin, which fell as low as $20,816, recovered somewhat but still ended down 2.7%.

Brent crude futures fell 1.17% to $120.84 a barrel, as investors worried about rate rises crimping demand, and a proposed U.S. tax on oil company profits. [O/R]

State Street’s Graf did not see recession as inevitable, but said the probability has increased with “monetary tightening and the squeeze on real incomes from commodity prices.”

Rising yields and the flight from risk helped the dollar surge to a 20-year high against a basket of currencies.

The dollar index, which measures the greenback against a basket of six major currencies, was up 0.3% after hitting a high of 105.65.

A strong dollar pinned the euro near a one-month low at $1.04160 and pressured the Japanese yen, which hit a new 24-year low at 135.42 against the dollar. [USD/]

With the Bank of Japan expanding bond purchases on Tuesday and unlikely to budge from its ultra-low rates policy at its Friday meeting, a respite for the yen looks unlikely.

“Given Wednesday may see the Fed go 75 bps and flag more, while the BOJ on Friday will only flag more bond buying, the yen is not going to stay at these levels for long. It’s going to get much, much worse,” Rabobank strategist Michael Every said.

A strong dollar and rising yields weighed on gold. Spot gold slipped 0.53% to 1,809.40 an ounce. [GOL/]

(Reporting by Sujata Rao; additional reporting by Scott Murdoch and Alun John in Hong Kong; Editing by Alex Richardson, Mark Heinrich, Leslie Adler and Richard Chang)

Stocks slide, dollar gains on hot U.S. inflation data

By Herbert Lash

NEW YORK (Reuters) -Global equity markets slumped and the dollar strengthened on Friday after a bigger-than-expected U.S. inflation spike in May raised concerns the Federal Reserve may tighten policy for too long and cause a sharp slowdown.

The U.S. consumer price index increased 8.6% last month, the largest year-on-year increase since December 1981, the Labor Department said. Economists polled by Reuters had expected CPI to rise 8.3% annually.

Many economists and market participants expected the data to show inflation had peaked, but gasoline prices hit a record high, the cost of food soared and rental prices surged.

“It was pretty hot. This report suggests that underlying inflation pressures remain quite strong,” said Aichi Amemiya, senior U.S. economist at Nomura.

The dollar rose to a near four-week high against a basket of currencies, while U.S. Treasury prices tumbled and short- and intermediate-dated yields hit their highest levels in more than a decade. Two-year yields, which are highly sensitive to rate hikes, spiked to 3.065%, the highest since June 2008.

Stocks on Wall Street and in Europe fell more than 2% as investors feared central bank efforts to control inflation would be so harsh it would slow growth and squeeze corporate earnings.

The pan-European STOXX 600 index fell 2.69% and MSCI’s gauge of global equity markets shed 2.79%.

On Wall Street, the Dow Jones Industrial Average fell 2.73%, the S&P 500 lost 2.91% and the Nasdaq Composite dropped 3.52%. The three indices posted their biggest weekly declines since January, tumbling roughly 5% each.

The S&P 500 is now down more than 18% from its Jan. 3 record closing peak, a drop that again puts it near to confirming a bear market as defined by a 20% drop on a closing-price basis.

The stronger-than-expected CPI data has changed the calculus for what the Fed does in September after “most assuredly” raising rates 50 basis points next week and in July, said Art Hogan, chief market strategist at National Securities.

Analysts at Barclays and Jefferies now expect the Fed to deliver its first 75 basis point increase in 28 years next week.

Fed funds futures traders expect the Fed’s benchmark rate to increase to 3.69% next May, from 0.83% now.

The Fed still has a chance of engineering a softer landing as there’s mounting evidence a slowdown is happening, said Rhys Williams, chief strategist at Spouting Rock Asset Management.

“At least in the goods economy, there are signs that demand is really slowing,” Williams said. “Houses are on the market much longer, auto sales are not so hot and shipping rates have collapsed coming from Asia to here.”

JAPAN HINTS AT YEN INTERVENTION

Concerns also mounted about demand and growth in China, the world’s second-largest economy, after Shanghai and Beijing imposed new COVID-19 lockdown restrictions.

The yen rose off 20-year lows after Japanese policymakers made rare comments about its weakness. Japan’s government and central bank said they were concerned by recent sharp falls in the yen in a rare joint statement, the strongest warning to date that Tokyo could intervene to support the currency.

The yen has been plumbing 20-year lows against the dollar and seven-year troughs against the euro on expectations the BOJ will continue to lag other major central banks in exiting its stimulus policy.

The Japanese yen later weakened 0.05% at 134.41 per dollar.

The dollar index rose 0.852%, with the euro down 0.9% to $1.0519.

Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.9%.

Continued strong buying by foreign investors and cautious hopes of regulatory easing on tech firms lifted China stocks, despite lockdown alerts.

China’s blue-chip CSI300 index was up 1.5%, while Hong Kong shares trimmed earlier losses to end off 0.2%.

Oil prices fell on concerns rising prices will force consumers to cut demand, and as China imposed new COVID-19 lockdown measures.

U.S. crude futures fell 84 cents to settle at $120.67 a barrel, and Brent settled down $1.06 at $122.01.

Gold prices rebounded strongly in volatile trade as focus turned to economic risks of elevated inflation.

U.S. gold futures settled up 1.2% to $1,875.50 an ounce.

(Reporting by Herbert Lash; Additional reporting by Carolyn Cohn in London, Shreyashi Sanyal in Bengaluru; Editing by Chizu Nomiyama, Kirsten Donovan, Alex Richardson and Cynthia Osterman)

Global stock markets rise, U.S. yields fall ahead of employment data

By Chibuike Oguh

NEW YORK (Reuters) -Global equity markets rose while U.S. yields were lower on Thursday after lower-than-expected private payrolls data stirred hopes that the American economy was likely cooling and the Federal Reserve might be persuaded to modify its aggressive stance on interest rates and inflation.

The ADP National Employment Report on Thursday showed that private payrolls rose by 128,000 jobs in May, which was much lower than the consensus estimate of 300,000 jobs and suggested that demand for labor was starting to slow.

If the private payrolls data is reaffirmed by the Labor Department’s more comprehensive jobs report on Friday, then the Fed would be unlikely to continue its pace of rate hikes, said Sandy Villere, portfolio manager at Villere & Co in New Orleans.

“Essentially, bad news is good news and good news is bad news. That means the economy is maybe cooling a little bit and the Fed can maybe calm down on their hikes because that is essentially controlling everything right now,” Villere said.

The MSCI world equity index, which tracks shares in 50 countries, was up 1.42%. The pan-European STOXX 600 index gained 0.57%.

U.S. Treasury yields pulled back from recent highs ahead of the closely watched employment report and what it could indicate about the possible trajectory of interest rates.

Two Fed officials, Vice Chair Lael Brainard and Cleveland Fed President Loretta Mester, reiterated on Thursday that the U.S. central bank would likely continue raising rates at a fast pace unless it sees a moderation in inflation.

Benchmark 10-year notes were trading down at 2.9149%, with two-year notes also down at 2.6438%.

On Wall Street, the S&P and the Dow rallied from earlier session losses and closed higher, with stocks in technology, consumer discretionary, communication services and financials sectors leading the rebound.

The Dow Jones Industrial Average rose 1.33% to 33,248.28, the S&P 500 gained 1.84% to 4,176.82 and the Nasdaq Composite added 2.69% to 12,316.90.

Oil prices settled higher after U.S. crude inventories fell more than expected amid high demand for fuel and OPEC+ agreed to boost crude output to compensate for a drop in Russian production.

Brent futures rose 1.69% to $118.26 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 1.97% to $117.53.

The U.S. dollar eased across the board, ceding some of the ground gained in recent sessions as firmer risk sentiment prompted investors to reach for higher-yielding currencies.

The dollar index fell 0.78%, with the euro up 0.94% to $1.0746.

Gold prices rose over 1%, supported by a dip in the dollar and the U.S. private payrolls data. Spot gold added 1.3% to $1,868.59 an ounce, while U.S. gold futures gained 1.38% to $1,868.70 an ounce.

(Reporting by Chibuike Oguh in New York; editing by Jonathan Oatis and Will Dunham)

Equities rise, yields fall after data shows U.S. inflation may have peaked

By Elizabeth Dilts Marshall

NEW YORK (Reuters) – World shares rose and the yield on benchmark U.S. Treasuries weakened on Friday after data showed that U.S. consumer spending rose in April and the uptick in inflation slowed, two signs the world’s largest economy could be on track to grow this quarter.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.9% last month, and although inflation continued to increase in April, it was less than in recent months. The personal consumption expenditures (PCE) price index rose 0.2%, the smallest gain November 2020.

The U.S. Federal Reserve, in minutes from its May meeting released earlier this week, called inflation a serious concern. A majority of the central bankers backed two half-of-a-percentage point rate hikes in June and July, as the group attempts to curb inflation without causing a recession.

The Fed did leave room for a pause in hikes if the economy weakens.

Analysts said the consumer spending and inflation data was encouraging and supported growth estimates for the second quarter that are mostly above a 2.0 annualized rate.

“The growth engine of the U.S. economy is still alive and kicking, and that’s important,” said Joe Quinlan, Head of CIO Market Strategy for Merrill and Bank of America Private Bank. “Growth estimates for (the second quarter) are still good. There is a better tone in the market than we have seen in recent weeks, in terms of inflation possibly peaking here. Maybe we can avoid stagflation.”

The MSCI world equity index, which tracks shares in 45 nations, rose 1.78% at 2:50 p.m. EDT (1850 GMT).

Global equity funds saw inflows in the week to May 25 for the first week in seven, according to Refinitiv Lipper.

European shares hit a three-week high rose 1.42%. Britain’s FTSE also hit a three-week high, and was heading for its best weekly showing since mid-March.

The Dow Jones Industrial Average rose 368.34 points, or 1.13%, to 33,005.53, the S&P 500 gained 75.33 points, or 1.86%, to 4,133.17 and the Nasdaq Composite added 319.75 points, or 2.72%, to 12,060.40.

The yield on benchmark 10-year Treasury notes was last 2.7432%. It had hit a three-year high of 3.2030% earlier this month on fears that the Fed may have to raise rates rapidly to bring inflation under control.

Lower yields shows the Fed’s monetary policy is succeeding in tightening credit and slowing down prices, said BofA’s Quinlan.

“The 10 year yield is suggesting we don’t have to have inflation break above 9-10%,” Quinlan said. “We are getting close to a peak in inflation.”

The two-year yield, which rises with traders’ expectations of higher fed fund rates, fell to 2.4839%.

German 10-year bond yields fell 4 bps to 0.955%.

Asian shares also benefited from hopes of stabilizing Sino-U.S. ties and more Chinese government stimulus.

The United States would not block China from growing its economy, but wanted it to adhere to international rules, Secretary of State Antony Blinken said on Thursday in remarks that some investors interpreted as positive for bilateral ties.

Emerging market stocks rose 2.01%. MSCI’s broadest index of Asia-Pacific shares outside Japan was 2.23% higher, while Japan’s Nikkei rose 0.66%.

The swing toward broadly positive market sentiment drove the dollar to one-month lows against an index of currencies.

The dollar index last fell 0.02%, with the euro up 0.03% to $1.0727.

Oil prices were near two-month highs on the prospect of a tight market due to rising gasoline consumption in the United States in summer, and also the possibility of an EU ban on Russian oil.

U.S. crude settled 98 cents higher, or up 0.86%, at $115.07 a barrel. Brent settled $2.03 higher, or up 1.73%, at $119.43 a barrel.

Spot gold added 0.2% to $1,852.83 an ounce.

(Reporting by Elizabeth Dilts Marshall, with additional reporting by Chuck Mikolajczak in New York, Carolyn Cohn in London, Stella Qiu in Beijing and Kevin Buckland in Tokyo; Editing by Chizu Nomiyama and Alistair Bell)

Most May FOMC participants backed 50 bp hikes in June and July

NEW YORK (Reuters) – All participants at the Federal Reserve’s May 3-4 policy meeting backed a half-percentage-point rate increase to combat inflation they agreed had become a key threat to the economy’s performance and was at risk of racing higher without central bank action, newly released minutes of the session showed.

The 50-basis-point rate increase this month was the first of that size in more than 20 years, and has set the Fed on course for a quick tightening of monetary policy, with “most participants” judging that further half-percentage-point increases would “likely be appropriate” at upcoming Fed sessions in June and July, according to the minutes, which were released on Wednesday.

STORY:

MARKET REACTION:

STOCKS: The S&P 500 extended gains to +0.75%

BONDS: The yield on the 10-year Treasury note slipped to 2.7577%. The 2-year note yield ticked up to 2.5161%

DOLLAR: The US dollar index eased back to a gain of 0.39%

COMMENTS:

EDWARD MOYA, SENIOR MARKET ANALYST, THE AMERICAS, OANDA, NEW YORK (emailed)

“US stocks edged higher as investors anticipate a quickly weakening economy will force the Fed into tapping the breaks with their tightening cycle.  The FOMC minutes are over three weeks old, but they did give a glimmer of hope that they could adjust their policy tightening stance later in the year.  The Fed mostly sees 50 basis point increases appropriate at the next couple of meetings as they are behind the curve with fighting inflation.  The Fed is optimistic about the economy, but they are growing concerned with markets for Treasuries and commodities.”    

MICHAEL JAMES, MANAGING DIRECTOR OF EQUITY TRADING, WEDBUSH SECURITIES, LOS ANGELES

    “Given all the negativity we’ve been dealing with for the last several weeks this is at least initially an exhale of relief that commentary wasn’t far more hawkish.”

    “All of this has to be taken with a grain of salt and keeping in mind that these are backward looking comments.”

    “The Fed has a very difficult line to try and walk between wanting to stifle inflation and not wanting to too negatively impact the economy.”

BOB MILLER, HEAD OF AMERICAS FUNDAMENTAL FIXED INCOME, BLACKROCK (emailed)

“The FOMC meeting minutes released today don’t provide us with any new policy information, but details of the discussion around the table do allow us to glean some insight into the Committee’s thinking on the forward path. Specifically, it’s very clear that bringing down inflation was (and is) the focus at the Fed’s May meeting; Chair Powell has reinforced the need to expeditiously raise rates toward broad estimates of neutral, as risks to inflation still tilt to the upside. As such, the Chair has already laid out a base case of 50 basis point (bps) policy rate hikes at the June and July meetings and other Fed speakers have endorsed this view.

“We think that after the July meeting the Fed is likely to become more “data dependent” with regard to rate hikes, which essentially means that the policy path after July will depend upon (a) the trajectory of inflation and (b) progress toward correcting the supply/demand imbalances in the labor market. In our view, if those factors are “improving” (which is to say lower levels of inflation and reduced labor market imbalances), then the Fed gains  some breathing room and can shift policy adjustments to 25 bps increments, while still pursuing something in the estimated range of neutral. This path would likely result in reduced market volatility and a lower probability of an economic hard landing. However, if those factors are not improving after the July FOMC meeting, then the Fed will likely be forced to continue to adjust policy in 50 bps increments, which would support continued high levels of market volatility and would increase the probability of unfriendly economic outcomes. Further, in that second scenario, consideration of 75 bps hikes may come back on the policy table.”

RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW VERNON, NEW JERSEY

“At this point for the market to really rally it needs some indication that the Fed has taken into account what is going on and is either really slowing the pace or changing things and that is just not the way they have typically have done it. They have tended to be very gradual in their guidance, I just don’t think there is enough there. On the positive side though, it wasn’t extremely hawkish, it was in some ways just a more moderate reflection of what is going on right now, a combination of inflation and what is probably a slowing economy.”

“The market looks ahead and their feeling is that the worst of the inflation news may be behind us. Obviously a wild card is energy prices, Russia and Ukraine, that would be one significant change. But otherwise I think the market is looking to stabilize here and looking a little bit forward to the point where the Fed can start to issue some different guidance and say the economy has slowed enough that they don’t see the need to continue to raise rates.”

(Compiled by the U.S. Finance & Markets Breaking News team)

Stocks rally as euro gains on likely rate hikes

By Herbert Lash and Marc Jones

NEW YORK/LONDON (Reuters) -U.S. and European stocks rallied on Monday, with the S&P 500 for the moment moving away from a bear market, while the euro leapt after the European Central Bank said it was likely to lift its deposit rate out of negative territory by September.

Oil prices slid and gold extended recent gains, but the dollar fell further as investors cut their bets on more greenback advances based on market expectations for rising yields as the Federal Reserve tightens money supply.

The MSCI all-country world index gained 1.54%, but is still down about 17% from its record high in January. The pan-European STOXX 600 index rose 1.26%, with the major British, French, German and Spanish indices rising more than 1% each.

Stocks on Wall Street also gained more than 1%, though the Nasdaq Composite initially lagged after briefly trading in the red.

The Dow Jones Industrial Average rose 1.98%, the S&P 500 advanced 1.86% and the Nasdaq Composite added 1.59% in choppy trade. Growth stocks rose 1.98%, outpacing a 1.74% gain in value stocks.

The rally lifted all 11 S&P 500 sectors and put the benchmark on track for its first week of gains after seven consecutive weekly losses on fears of a looming slowdown, yet many analysts say the equities downturn is not over.

Stock investors are under the illusion that the Fed will rescue the market from further decline by easing monetary policy, or what has become known as the Fed “put,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities.

“It’s going to be a very, very sluggish growth environment and the Fed’s not going stand in the way of it,” Ricchiuto added. “You’re seeing the bond market go down in yield. That’s been saying to the equity market that the put isn’t there and therefore the equity market needs to adjust as well.”

The yield on 10-year Treasury notes rose 7.7 basis points to 2.864% after a more than 40-basis-point decline from a multi-year high of 3.203% set two weeks ago.

Others also see the equity market in difficulty.

Given that a majority of S&P 500 constituents have already fallen by more than 20% from 52-week highs, it is safe to assume the bears are firmly in control of the market, said Anthony Saglimbene, Ameriprise’s global market strategist, in a note.

BlackRock Investment Institute cut its ratings of developed market equities to “neutral” from “overweight,” citing the Fed’s potentially overzealous efforts to curb inflation and signs of an economic slowdown in China.

The focus in Europe was on ECB President Christine Lagarde, who accelerated an already sharp policy turnaround from all but ruling out interest rate hikes to now penciling in several in the face of record-high euro zone inflation.

The prospect of higher rates lifted the euro 1.24% to $1.0691. The single currency has risen about 3.3% since hitting a multi-year low 10 days ago.

“The doves are throwing in the towel,” said Holger Schmieding of Berenberg bank, adding that he expects ECB rate hikes of 25 basis points in July, September and December.

A survey from the Ifo Institute showed that German business morale unexpectedly rose in May, helping to calm investors for the moment.

“I don’t think we have reached rock bottom yet, it’s a bear market rally. The market is still pretty concerned about sticky inflation,” said Michael Hewson, chief markets analyst at CMC Markets.

The World Economic Forum holds its first in-person meeting in two years in Davos, Switzerland over the next four days, with central bankers and the International Monetary Fund taking part in panels on the outlook for economies and inflation.

e87187ff-f36f-4504-90c8-ae98ebf306b34

PEAK DOLLAR?

The dollar index, which tracks the greenback against a basket of other major currencies, slid 0.855%. The index rose about 16% to a two-decade high over the 12 months to mid-May.

Asian stocks fell overnight as investors worried inflation and rising rates would hamper the global economy’s performance.

MSCI’s broadest index of Asia-Pacific shares outside Japan was slightly weaker.

Oil prices were little changed as worries over a possible recession offset an outlook for higher fuel demand with the upcoming U.S. summer driving season and Shanghai’s plans to reopen after a two-month coronavirus lockdown.

U.S. crude futures settled up 1 cent at $110.29 a barrel and Brent rose 87 cents to settle at $113.42.

Gold prices climbed as weakness in the dollar and economic growth concerns lifted the metal, though non-yielding bullion pared some gains after Treasury yields rose.

U.S. gold futures settled up 0.3% at $1,847.80 an ounce. [GOL/]

Bitcoin fell 3.55% to $29,189.85.

World FX rates YTDhttp://tmsnrt.rs/2egbfVhGlobal asset performancehttp://tmsnrt.rs/2yaDPgnAsian stock marketshttps://tmsnrt.rs/2zpUAr4S&P 500 bear marketshttps://tmsnrt.rs/3lrWFKrimage/pnggraphics:graphic:1https://fingfx.thomsonreuters.com/gfx/mkt/klpykodqmpg/Pasted%20image%201653065756392.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GXID:klpykodqmpg

(Reporting by Herbert Lash, additional reporting by Huw Jones in London; Editing by Emelia Sithole-Matarise, Kirsten Donovan, Will Dunham and Richard Chang)

World stocks slide as growth fears persist, safe-havens gain

By Herbert Lash

NEW YORK (Reuters) – Global equities fell further on Thursday, unable to sustain a late rally on Wall Street, as investors dumped stocks on fears of sluggish growth and bought safe-haven assets such as government debt and the Swiss franc.

Supply chain woes continued to fuel inflation and growth concerns as Cisco Systems Inc warned of persistent component shortages, knocking its shares down 13.7%. The plunge made it the latest big name stock this week to post its largest decline in more than a decade.

Data showed factory output in the U.S. Mid-Atlantic region decelerated far more than expected in May with the business outlook for the six months ahead the weakest in more than 13 years, a regional Federal Reserve bank survey said.

Some megacap growth stocks that have underperformed this year posted gains but the rally fizzled. The Dow Jones Industrial Average fell 0.75%, the S&P 500 lost 0.58% and the Nasdaq Composite dropped 0.26%.

Big slides for Walmart on Tuesday and Target on Wednesday have demoralized investors who wonder about rising costs across the supply chain, said Michael James, managing director of equity trading at Wedbush Securities.

“You got a pretty severe shock to the system for portfolio managers with the combination of those two,” James said. “That type of damage is hard to repair, piled on top of the extremely challenging year that technology investors have had,” he said.

But James said there are those view market as being extremely oversold and “you’re due for some kind of a bounce.”

Traders are looking for a catalyst that will turn the market around as a near-term bottom approaches, said Rick Meckler, president of hedge fund LibertyView Capital Management LLC.

But, “there’s probably still enough fear among investors to see a few more downdrafts,” he said.

Cash hoarding has reached the highest level since September 2001, indicating strong bearish sentiment, according to Louise Dudley, a portfolio manager at Federated Hermes Ltd.

Goldman Sachs estimates a 35% probability of a U.S. recession in the next two years, while Morgan Stanley sees a 25% chance of one in the next 12 months.

U.S. spot power and natural gas prices soared to their highest in over a year in some U.S. regions as Americans cranked up air conditioners during a spring heatwave.

MSCI’s gauge of stocks across the globe fell 0.65% and the pan-European STOXX 600 index lost 1.37%.

The S&P 500 is down about 18% from its record close on Jan. 3, and MSCI’s index has fallen the same since peaking on Jan. 4.

GRAPHIC: S&P 500 bear markets (https://fingfx.thomsonreuters.com/gfx/mkt/egpbkwmlgvq/Pasted%20image%201652990180837.png)

Germany’s 10-year bond yield fell below 1% and U.S. Treasury yields fell as more soft U.S. economic data stirred worries the Federal Reserve’s aggressive monetary tightening could hurt the global economy.

The yield on 10-year Treasury notes fell 3.8 basis points to 2.846%, after hitting a three-week low of 2.772%.

The dollar fell across the board, pulling back further from a two-decade high, as most other major currencies drew buyers.

The dollar index fell 0.896%, with the euro up 1.11% to $1.0582. The Japanese yen strengthened 0.35% to 127.79 per dollar.

The Swiss franc gained after Swiss National Bank president Thomas Jordan signaled on Wednesday the SNB was ready to act if inflation pressures continued.

GRAPHIC: Worst start to a year for world stocks (https://fingfx.thomsonreuters.com/gfx/mkt/byvrjdrjdve/Pasted%20image%201652952015101.png)

Central banks have been walking a tightrope, trying to regain control of decades-high inflation without causing painful recessions.

“We will have to discuss what we can do together in our respective areas of responsibility to avoid stagflation scenarios,” German finance minister Christian Lindner said as he arrived for a two-day meeting of top central bankers near Bonn.

Oil prices rebounded from two days of losses in a volatile session, bolstered by weakness in the dollar and expectations that China could ease some lockdown restrictions that could boost demand.

U.S. crude futures rose $2.62 to settle at $112.21 a barrel. Brent settled up $2.93 at $112.04 a barrel.

U.S. gold futures settled up 1.4% at $1,841.20 an ounce, as a weaker dollar and Treasury yields burnished bullion’s safe-haven appeal.

(Reporting by Herbert Lash, additional reporting by Marc Jones in London, Francesco Canepa in Koenigswinter, Germany, Stella Qiu in Beijing and Alun John in Hong Kong; Editing by Bernadette Baum, David Gregorio and Richard Pullin)

China, U.S. lead rise in global debt to record high $305 trillion – IIF

By Rodrigo Campos

NEW YORK (Reuters) – The world’s two largest economies borrowed the most in the first quarter as global debt rose to a record above $305 trillion, while the overall debt-to-output ratio declined, data from the Institute of International Finance showed on Wednesday.

China’s debt increased by $2.5 trillion over the first quarter and the United States added $1.5 trillion, the data showed, while total debt in the euro zone declined for a third consecutive quarter.

The analysis showed many countries, both emerging and developed, are entering a monetary tightening cycle -led by the U.S. Federal Reserve- with high levels of dollar denominated debt.

(GRAPHIC- Global debt totals: https://fingfx.thomsonreuters.com/gfx/mkt/zgvomebnxvd/GlobalDebt.png)

“As central banks move ahead with policy tightening to curb inflationary pressures, higher borrowing costs will exacerbate debt vulnerabilities,” the IIF report said.

“The impact could be more severe for those emerging market borrowers that have a less diversified investor base.”

The yield on the benchmark 10-year Treasury note has risen some 150 basis points so far this year and earlier this month hit its highest since 2018.

SOVEREIGNS BEWARE

Corporate debt outside banks and government borrowing were the largest sources of the increase in borrowing, with debt outside the financial sector rising above $236 trillion, some $40 trillion higher than two years ago when the COVID-19 pandemic hit.

Government debt has risen more slowly in the same period, but as borrowing costs rise sovereign balance sheets remain under pressure.

(GRAPHIC- Government financing needs: https://fingfx.thomsonreuters.com/gfx/mkt/movanzkwdpa/GovernmentFinancingNeeds.png)

“With government financing needs still running well above the pre-pandemic levels, higher and more volatile commodity prices could force some countries to increase public spending even further to ward off social unrest,” said the IIF.

“This might be particularly difficult for emerging markets that have less fiscal space.”

The lack of transparency has also become a burden for emerging markets, where total debt is approaching $100 trillion from $89 trillion a year ago.

“The lack of timely disclosure of public debt obligations, very limited coverage of contingent liabilities (including SOE liabilities) and the extensive use of confidentiality clauses are the major impediments causing information asymmetries between creditors and debtors,” said the IIF report, noting that it pushes borrowing costs higher while limiting access to private capital markets for EM borrowers.

(GRAPHIC- Government interest expense: https://fingfx.thomsonreuters.com/gfx/mkt/zdvxowdqjpx/GovernmentInterestExpenses.png)

The global debt-to-GDP ratio fell to 348%, about 15 percentage points below the record set a year ago, with major improvements seen in European Union countries. Vietnam, Thailand and Korea posted the largest increases in that measure, the IIF said.

“Growth is expected to slow significantly this year, with adverse implications for debt dynamics,” said the IIF report.

“On the back of strict lock-downs in China and tighter global funding conditions, the anticipated slowdown will likely limit or even reverse the downward trend in debt ratios.”

(Reporting by Rodrigo Campos; Editing by Chizu Nomiyama)

Shares rebound, Treasury yields rise on stronger data

By Herbert Lash

NEW YORK (Reuters) – Global equity markets rallied and Treasury yields rose on Tuesday, as solid U.S. retail sales in April suggested economic growth might strengthen, as did an easing of China’s lockdowns to contain the COVID-19 pandemic.

U.S. retail sales rose 0.9% last month while data for March was revised higher to show sales advancing 1.4% instead of 0.7% as previously reported, the Commerce Department said.

The data show U.S. consumers weathering inflationary headwinds as sales gained for the fourth consecutive month, said Jeffrey Roach, chief economist for LPL Financial. Sales are nominal, so much of the increase is from higher prices, he said.

“We expect a rebound in economic growth in Q2,” Roach said in an email, if prices moderate enough to relieve some of the pressure on consumers.

U.S. and European stocks rallied following gains overnight in Asia. MSCI’s gauge of stocks across the globe closed up 2.0%. The pan-European STOXX 600 index rose 1.22%.

On Wall Street, the Dow Jones Industrial Average rose 1.28%, the S&P 500 gained 1.89% and the Nasdaq Composite advanced 2.57%. Growth stocks rose 2.48% while value shares gained 1.60%. [.N/C]

The gains were a rebound from overselling last week, said Anthony Saglimbene, global market strategist at Ameriprise Financial, citing the sixth straight weekly loss for the Nasdaq and S&P 500.

“There’s this battle in the stock market between what breaks first: inflation or the consumer. The stock market is betting that the consumer is going to break and credit markets are betting that inflation is going to break first,” he said.

“The stock market is getting close to overcorrecting and pricing in the probability of a recession that I think is just too high,” Saglimbene said.

Data also showed industrial production rose 1.1% in April, with the manufacturing capacity utilization rate at its highest since 2007. The sector is running too hot and needs to slow for inflation to get under control, said Bill Adams, chief economist for Comerica Bank.

The Federal Reserve will raise the federal funds rate half a percentage point at each of its next two policy meetings to throw some sand in the economy’s gears, Adams said in an email.

The U.S. central bank will “keep pushing” to tighten U.S. monetary policy until it is clear inflation is declining, Fed chair Jerome Powell said at a Wall Street Journal event.

“What we need to see is inflation coming down in a clear and convincing way,” he said. “If we don’t see that, we will have to consider moving more aggressively” to tighten financial conditions.

The Fed is behind the curve and trying to play catch up, said Brian Ward, chief executive of Broadmark Realty Capital Inc.

“We are trying to address a very complex set of facts with a very blunt instrument via monetary policy and I think that it’s not going to turn out well,” Ward said.

The yield on 10-year Treasury notes rose 10.7 basis points to 2.986%.

The dollar eased for a third straight day, pulling back from a two-decade high against a basket of major peers, as an uptick in risk appetite cut the greenback’s safe-haven appeal.

The dollar index fell 0.787%, with the euro up 1.07% to $1.0543. Japan’s yen weakened 0.14% to 129.36 per dollar.

Fears remain about the strength of the world’s two largest economies after weak retail and factory figures in China and some disappointing U.S. manufacturing data..

An index compiled by U.S. bank Citi that monitors whether economic data comes in better or worse than economists had been expecting is back in negative territory.

Graphic: Negative surprises – https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkgkqlpx/Pasted%20image%201652779321439.png

Crude oil gave up gains on news Washington may ease restrictions on Venezuela’s government, and prices fell further when Powell began to speak on concerns a Fed policy error could slam the economy and reduce energy demand.

U.S. crude futures fell $1.80 to settle at $112.40 a barrel and Brent settled down $2.31 at $111.93 a barrel.

Gold fell as the robust U.S. retail sales data and likelihood of aggressive Fed rate hikes outweighed support from a weaker dollar.

U.S. gold futures settled up 0.3% at $1,818.9.

Hopes that China might ease lockdowns after Shanghai achieved the long-awaited milestone of three straight days with no new COVID-19 cases outside quarantine zones.

Mainland China’s CSI300 Index gained 1.25% while Hong Kong’s Hang Seng Index rose 3.27%, as tech firms listed in the city jumped nearly 6% on hopes of Beijing’s crackdown on the sector being relaxed.

(Reporting by Herbert Lash; Additional reporting by Lawrence White in London and Scott Murdoch in Hong Kong; Editing by Lincoln Feast, Kirsten Donovan, Barbara Lewis, Jonathan Oatis and David Gregorio)

Inflation views tilt the Fed’s way, a bit

(Reuters) – A week that included a bevy of still-ugly inflation numbers may also have marked a turn in market views of the Federal Reserve, as inflation expectations fell, bond yields moderated, and even consumers stopped ratcheting up their outlook for price increases.

A survey of professional forecasters, meanwhile, seemed to endorse the Fed’s hope it can tame inflation without killing millions of jobs in the process.

Estimates for annual inflation a year from now in the Philadelphia Federal Reserve’s quarterly survey published on Friday dropped to 3% or less, depending on the specific price measure. Meanwhile the consensus view on the unemployment rate in the next two years ticked up to just 3.8% from the current 3.6%, an outcome that would enthuse Fed officials if it plays out.

Policymakers, including Chair Jerome Powell, have been warning U.S. households that the large increases in interest rates they are planning to control the inflation that has soured the national mood are likely to be painful in and of themselves. The Fed raised its benchmark rate by half a percentage point last week and Powell has said increases of the same magnitude are warranted at meetings in the next two months.

“The process of getting inflation down to 2% (the Fed’s target) will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that’s like,” Powell told public radio’s Marketplace on Thursday.

The week’s headline annual inflation readings at the consumer and business production levels eased for the first time in months, offering some hope that consumer price increases that reached 8.5% year-over-year in March may have crested.

While they didn’t slow by nearly as much as expected, investors – rather than further stoking fears of ever-increasing inflation – responded to the upside-surprises by bidding up bond prices and pulling yields from multi-year highs.

On the week, the 10-year Treasury note yield dropped by about 20 basis points, the biggest weekly decline since early March, and the 10-year inflation expectation reflected in Treasury Inflation-Protected Securities hit its lowest since February.

Indeed, a new inflation expectations benchmark measurement from ICE showed the one-year outlook has now dropped to near 4.5% from 6% in mid-April.

Graphic – ICE inflation expectations index ICE inflation expectations index: https://graphics.reuters.com/USA-FED/INFLATION/akvezxjwrpr/chart.png

About half of the drop in Treasury yields appears to have been driven by the decline in inflation expectations, Piper Sandler’s Head of Global Policy Roberto Perli wrote in a note disentangling that aspect from other factors that contribute to changes in bond yields.

That “is good news for the Fed,” Perli wrote. “(I)f it continues (which is a big if, of course), it might even induce the Fed to be somewhat less forceful in its hiking campaign. However, market inflation expectations are still too high for the Fed to claim victory for now.”

Consumers, meanwhile, appear to believe the price grind will not keep accelerating.

Data out Friday from the University of Michigan’s twice-monthly survey of consumer attitudes showed no upward move in households’ outlooks for inflation one year out for the third months in a row, holding steady at 5.4%. The view over five years was unchanged at 3% for a fourth straight month.

“They are still in the game,” former Fed governor Randall Kroszner said of the Fed’s quest for a so-called “soft landing.”

“Inflation expectations have not become unanchored despite inflation going from a decade where they cannot get to the goal to going to four times it. They have maintained credibility,” said Kroszner, now a professor at the University of Chicago Booth School of Business. “That is a pretty amazing feat.”

(Reporting By Howard Schneider and Dan Burns; Editing by Chizu Nomiyama)

S&P 500 ends below 4,000 for 1st time since March 2021; growth shares lead decline

By Caroline Valetkevitch

NEW YORK (Reuters) – The S&P 500 ended below 4,000 for the first time since late March 2021 and the Nasdaq dropped more than 4% on Monday in a selloff led by mega-cap growth shares as investors grew more concerned about rising interest rates.

The Nasdaq closed at its lowest level since November 2020. Apple shares dropped 3.3% and were the biggest weight on the Nasdaq and the S&P 500. Microsoft Corp dropped 3.7% and Tesla Inc fell 9.1%.

Investors are worried about how aggressive the Federal Reserve will need to be to tame inflation. The U.S. central bank last week hiked interest rates by 50 basis points.

Benchmark 10-year U.S. Treasury yields hit their highest levels since November 2018 before easing on Monday.

“Markets are digesting the start of a return to a more normal monetary policy environment,” said Kristina Hooper, chief global market strategist at Invesco in New York.

“Moving more aggressively (on rates) raises the specter of a recession, especially with all of these complications – high inflation, Russia’s invasion of Ukraine, COVID-related supply chain disruptions,” she said.

Investors have also been worried about an economic slowdown in China following a recent rise in coronavirus cases.

The Dow Jones Industrial Average fell 653.67 points, or 1.99%, to 32,245.7, while the S&P 500 lost 132.1 points, or 3.20%, to 3,991.24, its lowest close since March 31, 2021.

The Nasdaq Composite dropped 521.41 points, or 4.29%, to 11,623.25.

The S&P 500 is now down 16.3% for the year so far.

Among the hardest hit in the recent selloff have been technology and growth stocks, whose valuations rely more heavily on future cash flows.

All S&P 500 sectors ended lower on Monday except for consumer staples, which rose 0.1%.

The energy sector fell 8.3% as oil prices dropped.

The S&P 500 growth index was down 3.9% on the day, while the S&P 500 value index fell 2.5%.

Twitter Inc shares eased more than 3% as Hindenburg Research took a short position on the social media company’s stock, saying the company’s $44 billon deal to sell itself to Elon Musk has a significant risk of getting repriced lower.

Volume on U.S. exchanges was 15.29 billion shares, compared with the 12.34 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancing ones on the NYSE by a 7.18-to-1 ratio; on Nasdaq, a 5.44-to-1 ratio favored decliners.

The S&P 500 posted 1 new 52-week highs and 73 new lows; the Nasdaq Composite recorded 13 new highs and 1,217 new lows.

(Additional reporting by Devik Jain and Amruta Khandekar in Bengaluru; Editing by Shounak Dasgupta, Anil D’Silva and Aurora Ellis)

Inflation, Ukraine war seen as chief financial risks -Fed report

(Reuters) – High inflation, volatility in stock and commodity markets and the war in Ukraine have emerged as the chief risks to the U.S. financial system, the Federal Reserve reported on Monday in a biannual update on financial stability that warned of a system poised for potentially “sudden” disruption.

The quick rise in U.S. Treasury yields, the war-related trouble in oil markets and other factors have already strained some parts of the financial system, the report cautioned, and while the stress “has not been as extreme as in some past episodes, the risk of a sudden significant deterioration appears higher than normal.”

“It is noteworthy that households and businesses have decreased their borrowing as a percentage of gross domestic product, and currently appear to have resources to cover debt burdens, which is an important aspect of resilience in an environment of rising interest rates,” Fed Governor and vice chair-designate Lael Brainard said in a statement accompanying the report.

The report is the first to take stock of the rapid shifts in the financial landscape that have taken place since last fall, including a swifter tightening of monetary policy by the Fed and rising interest rates generally, inflation that has threatened to become more persistent, and Russia’s invasion of Ukraine.

The volatility has been apparent in U.S. stock markets that have dropped sharply in recent weeks as well as in bond markets that have adjusted to higher U.S. interest rates and tougher financial conditions as part of the Fed’s efforts to slow inflation.

“Inflation has been higher and more persistent than expected, even before the invasion of Ukraine, and uncertainty over the inflation outlook poses risks to financial conditions and economic activity,” the report noted.

“Financial markets experienced high volatility and some strains on market liquidity,” over the last six months, the report said. “On net, over the period, Treasury yields increased markedly, broad equity prices declined notably, and credit spreads widened considerably in corporate bond markets.”

Since closing at a record high on the first trading day of 2022, the benchmark Standard & Poor’s 500 Index has since slid 16.5% and the Nasdaq Composite has fared even worse, losing more than a quarter of its value in roughly six months. Yields on the 10-year Treasury note, influential to a range of consumer and business financing costs, has roughly doubled since the year began.

In a survey of economists and market participants about the chief risks facing the U.S. financial system, threats from the pandemic had faded and been replaced a suddenly uncertain geopolitical environment.

Survey respondents, the report said, were concerned that “stresses in Europe related to the Russian invasion of Ukraine or in emerging markets – such as those that could arise from China or be driven by inflationary pressures – could spill over to the United States. In addition, elevated inflation and rising rates in the United States could negatively affect domestic economic activity, asset prices, credit quality, and financial conditions more generally.”

Overall corporate balance sheets remain healthy, with ample cash flow now to cover interest payment obligations. But, the report said, “the effect of high inflation, rising interest rates, supply chain disruptions, and the ongoing geopolitical conflict on corporate profitability is uncertain. A significant decline in corporate profitability or an unexpectedly large increase in interest rates could curtail the ability of some firms to service their debt.”

“In addition, the upward pressure on oil prices, if sustained, could curb the recovery in hard-hit industries such as airlines.”

(Reporting by Howard Schneider; Editing by Andrea Ricci)

Stocks rally after Fed hikes rates, crude jumps

By Herbert Lash

NEW YORK (Reuters) – U.S. stocks rallied and Treasury yields fell on Wednesday after the Federal Reserve raised interest rates by 50 basis points as expected and said it would begin to reduce its balance sheet in June in a decision seen as less hawkish than some feared.

The U.S. central bank set its federal funds rate to a range between 0.75% and 1% in a unanimous decision that gave the benchmark overnight rate its biggest bump in 22 years.

There was little initial reaction to a policy statement that mostly met expectations. But when Fed Chair Jerome Powell said the Fed was not “actively considering” a 75 basis-point rate hike, stocks rallied and bond yields reversed earlier gains.

“The key turning point was when he said they were not actively considering 75 bps,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

“At worst, the Fed wants to meet market expectations. At best, they want to go slower or lower than what the market was pricing,” he said.

The dollar index fell 0.86% and the euro rose 0.89% to $1.0614, while the yield on 10-year Treasury notes fell 3.1 basis points to 2.927%.

Risk assets rallied, causing the U.S. dollar to “soften a touch, a classic ‘buy the rumor, sell the fact’ trade, while also sparking demand for Treasuries,” said Michael Brown, head of market intelligence at Caxton in London.

“Although hawkish in its own right, the decision is somewhat dovish compared to the market’s lofty expectations,” he said.

MSCI’s gauge of stocks across the globe closed up 1.67%. On Wall Street, the Dow Jones Industrial Average rose 2.81%, the S&P 500 gained 2.99% and the Nasdaq Composite added 3.19%. [.N] Stocks closed lower in Europe on disappointing earnings and investor uncertainty before the Fed’s decision. The pan-European STOXX 600 index dropped 1.1%, with retailers leading sector losses, and major regional indexes also fell.

Germany’s 10-year government bond traded near multi-year highs, hitting its highest yield since June 2015 at 1.036%, after European Central Bank board member Isabel Schnabel said a rate hike in July was possible.

Overnight in Asia, many Chinese and Japanese stock markets were closed.

Oil prices rose about 5% as the European Union, the world’s largest trading bloc, spelled out plans to phase out imports of Russian oil, offsetting demand worries in top importer China.

European Commission President Ursula von der Leyen proposed a phased oil embargo on Russia over its war in Ukraine, as well as sanctioning Russia’s top bank, in a bid to deepen Moscow’s isolation.

U.S. crude futures gained $5.40 to settle at $107.81 a barrel and Brent settled up $5.17 at $110.14.

Gold bounced higher after Powell flagged risks to the economy from soaring inflation. Earlier, U.S. gold futures settled down 0.1% at $1,868.8 an ounce.

The global monetary tightening cycle has reached a symbolic milestone, with yields on German, British and U.S. 10-year government debt topping 1%, 2% and 3% respectively, levels not seen in years. That in turn has raised borrowing costs for businesses and households.

The Bank of England is expected to lift British rates on Thursday by a quarter of a percentage point, which would be its fourth hike in a row to quell surging prices.

Graphic: US dollar and treasury – https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnymkgvq/US%20dollar%20and%20treasury.JPG

The Aussie dollar gained as much as 1.3%, and local shares fell, after the Australian central bank’s bigger-than-expected 25 basis-point rate increase on Tuesday.

Bitcoin rose 5.68% to $39,871.90 after earlier trading lower.

Graphic: Europe’s natural gas imports from Russia – https://fingfx.thomsonreuters.com/gfx/mkt/zdvxogjmepx/Pasted%20image%201651650909918.png

(Reporting by Herbert Lash in New York; Additional reporting by Saqib Ahmed and Chuck Mikolajczak in New York and Huw Jones in London; Editing by Alex Richardson and Matthew Lewis)

Analysis-U.S. real rates up on hawkish Fed but inflation risk looms

By Davide Barbuscia

NEW YORK (Reuters) – A jump in U.S. real yields back into positive territory is a sign that a hawkish Federal Reserve is succeeding in tightening some financial conditions, but the jury is still out on how much of an impact higher rates will have on inflation.

The U.S. central bank will likely increase rates by half a percentage point this week and launch quantitative tightening – the reversal of a bond buying program that injected extra liquidity in the pandemic-hit U.S. economy, but also contributed to its overheating as consumer demand picked up.

Plans to tighten monetary conditions have led to a selloff in U.S. bond markets this year and to rising yields on Treasury Inflation-Protected Securities (TIPS), also known as real yields because they subtract projected inflation from the nominal yield on Treasury securities.

Yields on the 10-year TIPS had been in negative territory since March 2020, meaning investors would have lost money on an annualized basis when buying a 10-year Treasury note, adjusted for inflation, but they jumped about 20 basis points on Monday from negative 0.057% on Friday.

“Negative real rates for the last two years incentivized everything from buying crypto to even gold, housing, stocks, basically anything that had a higher yield,” said George Goncalves, head of U.S. macro strategy at MUFG.

“Now that they are turning positive, it’s definitely a tightening of financial conditions,” he said.

Positive real yields are typically a sign of a good economic outlook. Rising real yields in recent weeks, however, have come with expected hikes from the Fed as the central bank embarks on an urgent need to contain inflation.

Nominal yields for the benchmark 10-year U.S. Treasury notes also rose this week, but by a smaller extent, with the U.S. benchmark 10-year Treasury yield hitting 3% on Monday for the first time since December 2018.

For Dave Plecha, global head of fixed income at Dimensional Fund Advisors, the market is pricing not only the Fed’s actions but also the effects of monetary tightening. He added that real yields turning positive on the far end of the curve reflects a movement toward historical averages.

“I don’t think it’s shocking to expect in the long run positive real yields on five, 10, 20, or 30-year TIPS”, he said.

The 10-year breakeven inflation rate – which shows inflation expectations by measuring the yield spread between 10-year TIPS and 10-year Treasury notes – declined to 2.91% this week, further retreating from 3.14% hit last week, the highest since at least September 2004.

“It’s real rates that affect the economy, and if the Fed is trying to tighten financial conditions to slow down inflation .. they want to see real rates move higher”, said Matthew Nest, global head of active fixed income at State Street Global Advisors.

Tighter monetary policies are starting to have an impact on interest rate-sensitive sectors, such as mortgages, with demand starting to ebb in recent weeks. Junk bond spreads have also widened – although not to the extent seen in the early days of the pandemic.

The risk is that while the market may be pricing in lower inflation expectations due to a less accommodative Fed stance, prices will continue to remain elevated because of supply dynamics which are driven by factors over which central banks have no control, such as the Ukraine crisis or new waves of the COVID-19 pandemic.

“I don’t really believe that just within a short period of time … any of us are going to be able to see any real changes in inflation dynamics,” said Yvette Klevan, managing director on the Global Fixed Income team at Lazard Asset Management.

Money market futures tied to the Fed’s policy rate show heavy bets on the Fed funds rate hitting about 2.8% by the end of the year, compared with the current 0.33% level. Rate futures also priced in about 250 bps of tightening in 2022. [FEDWATCH]

But the Fed and other central banks may not be able to tighten conditions to the degree markets are expecting, said Klevan. “Over the next year, I would lean on the side of saying that I don’t think all of those hikes that are priced in are going to be realized,” she said.

(Reporting by Davide Barbuscia in New York; Editing by Megan Davies and Matthew Lewis)

Investor pessimism mounts as more Fed rate hikes loom

By Lewis Krauskopf and Saqib Iqbal Ahmed

NEW YORK (Reuters) – Stock market investors are heading into the U.S. Federal Reserve’s rate-setting announcement particularly pessimistic, with fresh milestones for bond yields and worries about rocketing inflation weighing on sentiment as the central bank is expected to hike rates further.

The benchmark S&P 500 is down over 12% so far this year after posting its biggest monthly drop in April since the start of the pandemic. Meanwhile, the yield on the U.S. Treasury note hit 3% for the first time in over three years on Monday, doubling since the end of 2021.

The higher yields on U.S. government debt, which is viewed as virtually risk free, mean “you probably are starting to lose some of those folks who had maybe crowded into dividend-paying stocks and were maybe having to take a little bit more risk for that income,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

“The implication for equities is you start to lose demand for stocks relative to fixed income,” Samana said.

Some investors are clearly very gloomy. Paul Tudor Jones, founder and chief investment officer of Tudor Investment Corp, told on Tuesday that he couldn’t think of a “worse environment than where we are right now for financial assets.”

Yields up, stocks down https://fingfx.thomsonreuters.com/gfx/mkt/akpezyjjqvr/Pasted%20image%201651594541397.png

In another weight on stocks, yields on the 10-year Treasury Inflation-Protected Securities (TIPS) – also known as real yields because they subtract projected inflation from the nominal yield on Treasury securities – have pushed solidly into positive territory after being in negative territory since March 2020.

Negative real yields have meant that an investor would have lost money on an annualized basis when buying a 10-year Treasury note, adjusted for inflation, a dynamic that has helped divert money from U.S. government bonds and into stocks and other risky assets.

Real U.S. yields on the rise https://graphics.reuters.com/USA-STOCKS/FED/zjvqkmdkzvx/chart.png

The Cboe volatility index, known as Wall Street’s “fear gauge,” has climbed from 20 just a couple weeks ago to over 36 on Monday, and finished just shy of 30 on Tuesday. An elevated VIX reflects increased investor expectations for choppy markets in the near term.

Rising risk https://fingfx.thomsonreuters.com/gfx/mkt/mopanobdava/Pasted%20image%201651593560098.png

Amid the market’s slide, stock investors have reached new levels of pessimism. Bearish sentiment, which are expectations that stock prices will fall over the next six months, rose sharply to 59.4% in the latest survey by the American Association of Individual Investors. The last time bearish sentiment went above that level was in March 2009 during the financial crisis.

Bears on the prowl https://graphics.reuters.com/USA-STOCKS/FED/dwvkryqlypm/chart.png

Such weak sentiment can be a contrary positive indicator for stocks. The net spread in the AAII survey between bulls and bears fell to negative 43 percentage points in the latest survey, with a four-week average of negative 29 percentage points.

Since 1987, when such an average four-week spread has been below negative 10 percentage points, the S&P 500 has risen 15.5% on average over the next 12 months, according to RBC Capital Markets.

How stocks do when investors are bearish https://graphics.reuters.com/USA-STOCKS/FED/myvmnyqqwpr/chart.png

Indeed, some investors say the stock market could be set up for a short-term rally, should nothing from Wednesday’s Fed meeting catch them off guard. Following the Fed’s last meeting in March, the S&P 500 rallied 8% in the two weeks after the central bank raised rates by 25 basis points, as expected.

Traders in the options market remain cautious, with some measures of sentiment, including the put-to-call ratio of open contracts on the SPDR S&P 500 ETF close to the most bearish they have been in recent years, according to Trade Alert data. Excessive bearish positioning can help drive sharp rallies if sentiment reverses abruptly.

“The sentiment is really bad… Everything is starting to line up to be very oversold and overdone in the short term,” said Walter Todd, chief investment officer at Greenwood Capital in South Carolina. “Assuming you don’t get a big hawkish surprise out of the Fed, you could see a rally.”

(Reporting by Lewis Krauskopf and Saqib Iqbal Ahmed; editing by Bernard Orr)

The Fed wants to cool the U.S. housing market. Here’s what that feels like

By Ann Saphir and Lindsay Dunsmuir

(Reuters) – In mid-April, months into an increasingly frustrating house hunt, Harsh Grewal and his wife settled on a place in a San Francisco suburb and were prepping a bid, above the listed price so they’d have a chance of besting other offers in one of the nation’s hottest housing markets.

Then he checked his phone and saw several alerts, all touting reduced prices for other homes they’d been tracking. The Grewals pulled their offer and put their search on ice in hopes it was a sign the market was finally cooling. “I want to see where this goes, and where the dust settles,” Grewal said.

That’s exactly what Federal Reserve policymakers hope to see more of as they raise interest rates to bring down 40-year high inflation.

One leg of their effort is taking the heat out of the housing market, where low borrowing costs introduced to cushion the economy from the COVID-19 pandemic helped fuel a 35% rise in home prices over the past two years. While house prices are not part of the inflation indexes the Fed tracks, they do feed into other factors – such as rents – that are influential to inflation.

Rising rates mean borrowing for a house is suddenly more expensive. The 10-year Treasury note yield, a benchmark for mortgage rates, has risen on expectations of swift Fed rate hikes. The average 30-year-fixed home loan rate is now 5.37%, up more than 2 percentage points since the year began, according to the Mortgage Bankers Association.

So buyers of a typical existing home, which went for $375,000 in March, will pay $440 more each month than they would have in December, if they put 20% down and borrow the rest at a fixed rate for a 30-year term.

Higher interest rates account for most of that. Meanwhile inflation is also driving up grocery bills and gasoline costs.

“The housing market is definitely out of whack,” said Fed Governor Christopher Waller, who recounted last month how he sold his St. Louis home to an all-cash buyer with no inspection. “We’ll see how the interest rates start cooling things off going forward.”

New homebuyers face sharply higher costs https://graphics.reuters.com/USA-FED/HOUSING/jnvwerjrevw/chart.png

‘AN INFLECTION POINT’

The last time mortgage rates rose this fast was in the spring of 1994. Total home sales fell 20% as the Fed lifted rates, and home price growth slowed.

Economists predict a sales drop and slowing price growth this time, too, perhaps to a roughly 5% annual rate by year end.

But an unprecedented collection of factors, including record-low housing stock, unusually high household savings, an extremely tight job market and increased worker mobility are creating crosscurrents that could blow that forecast off course.

Sales of previously owned homes were the lowest in nearly two years in March, according to the National Association of Realtors. Mortgage applications are down as well.

List-price drops like those the Grewals noticed are more common, accounting for 13% of homes for sale in the four weeks from mid-March to mid-April, according to real estate company Redfin, up from 9% a year earlier.

At the same time, mortgage applications remain above pre-COVID levels, and house prices hit a record as homes were snatched up typically within 17 days of listing.

Some of that could be a last-gasp effort of buyers, particularly those with pre-approved financing, racing to purchase homes before rates go even higher.

“The next couple of months things are going to heat up until we get to an inflection point,” probably this summer, Zillow Economist Nicole Bachaud said.

The soaring cost of home loans https://graphics.reuters.com/USA-FED/HOUSING/byvrjnrlxve/chart.png

THIS TIME IS DIFFERENT?

The correlation between house price growth and mortgage rates, while still strong, has been declining though over the past 20 years, said Anne Thompson, a lecturer and research scientist at MIT who recently co-authored a paper with Yale University’s Robert Shiller arguing that soaring prices do not appear to reflect a bubble.

“I wouldn’t even necessarily call it a cooling, I’d call it a flattening of rates of appreciation, but not this year because there are still relatively low interest rates,” Thompson said, noting that mortgage rates have historically been much higher.

Many regional markets remain very hot, particularly in the South, helped by buyers having more flexibility on where they work as well as strong wage gains amid a shortage of workers.

Those factors may also bolster housing sales even if higher rates take some of the steam out of price rises.

Rob Lubow, 35, and his husband worked remotely from their two-bedroom Austin, Texas, rental apartment until late last year when Lubow’s firm began calling employees back to the office.

In January Lubow began looking for a new job that would let him work from home permanently. A month later he had one – and a 35% salary increase.

Austin home prices had climbed way above their $300,000 maximum reach. The median home price was $624,000 in March, up from $415,000 two years earlier, data from the Austin Board of Realtors shows.

Their remote-only jobs meant mobility, so last month they bought a three-bedroom house in Kingston, New York, for just under their budget. The median home price there is $280,000, according to Redfin, up almost 20% since last year.

“If people respond to higher housing costs by moving to more affordable places, that could lead to more home sales,” Redfin Chief Economist Daryl Fairweather said.

A near-record low number of homes are for sale https://graphics.reuters.com/USA-ECONOMY/dwpkryrmavm/chart.png

‘INSANE’

Record low inventory over the past couple of years also means there is plenty of pent-up demand, particularly among Millennials ready to set up a home, whose share of purchases has been growing. But that is bumping up against Boomers, discouraged from downsizing by the rising costs of alternative housing, staying put and keeping the larger homes desired by younger people off the market at a time when too-few new homes are being built.

Meanwhile, data from the Realtors group shows the share of all-cash sales was the largest in nearly eight years in March, a sign supply is being gobbled up by institutional investors or second-home buyers.

Mike Wang, 33, works at a vitamin manufacturer and rents a Los Angeles apartment. He’s had a number of promotions and now makes 50% more than he did three years ago. “Even with making more money than I could have hoped for when I was 20-something, house prices have far outpaced that – which when I think about that I’m like, holy cow, that is insane.”

So Wang says he sees little choice but to wait in the hope prices slow as predicted and he can catch up enough to buy a house in a few years.

With so many people his age wanting to buy homes, and so few houses being built, he’s not convinced it will happen that way.

“Having been surprised in the past, I wouldn’t be surprised to see things buck all the analyst forecasts,” Wang said.

(Reporting by Ann Saphir and Lindsay Dunsmuir; Editing by Dan Burns and Andrea Ricci)

Rocky stock market faces Fed test with eyes on tightening plans

By Lewis Krauskopf

NEW YORK (Reuters) -A volatile stock market faces a critical test next week, when the U.S. Federal Reserve is expected to raise interest rates and give more insight on its plans for tightening monetary policy to fight surging inflation.

Worries over an increasingly hawkish Fed have helped drag the benchmark S&P 500 index down 13.3% so far in 2022, , its steepest four-month decline to start any year since 1939.

While investors have ramped up expectations of how aggressively the central bank may tighten monetary policy, many are concerned the Fed will not be able to keep the economy afloat as it battles the worst inflation in nearly four decades.

Compounding concerns over monetary policy, investors have been riled by everything from rising bond yields to the war in Ukraine and more recently lockdowns in China. The market is also entering a historically weaker six-month period for stocks.

“We’re going to be in for, I think, more dicey, choppy, volatile markets here for a while longer, just because of the uncertainty,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas, who said that “things turned the other direction right at the beginning of the year,” coming off a strong fourth quarter at the end of 2021.

Investors widely expect the Fed to raise rates by 50 basis points when the central bank’s meeting concludes on Wednesday. They are also bracing for signals from Fed Chair Jerome Powell about the future path of interest rates, the central bank’s plans for reducing its balance sheet and its view on when inflation will recede. Policymakers raised rates in March by 25 basis points, the first increase since 2018.

“If the Fed continues to expect high levels of inflation and they don’t see it moderating in the future, that will be a concern for investors,” said Michael Arone, chief investment strategist at State Street Global Advisors. “It will mean that the Fed will continue to raise rates and tighten monetary policy, which the market is expecting, but maybe even more aggressively.”

Beyond next week’s action, policymakers have coalesced around an overall increase of the federal funds rate to at least 2.5% by year end.

Crucial to the tightening plans will be how persistent officials view the current pace of inflation after March’s consumer price index showed an annual increase of 8.5%, the largest rise in over 40 years.

Given that there are indications inflation has started to peak, said Kei Sasaki, senior portfolio manager at Northern Trust Wealth Management, “if there is an even more resounding hawkish tone coming out of that meeting, then that could certainly be viewed as negative.”

The selloff accelerated on Friday as the S&P 500 tumbled 3.6% — its biggest one-day drop since June 2020 — following a disappointing earnings report from Amazon that sent the e-commerce giant’s shares down 14%.

The month of April marked the S&P 500’s biggest monthly fall since the onset of the coronavirus pandemic in early 2020, while the tech-heavy Nasdaq logged its largest monthly drop since the 2008 financial crisis.

As investors have girded for tighter monetary policy, bond yields have jumped this year, with the yield on the 10-year Treasury note up to about 2.9% from 1.5% at the end of 2021.

That has particularly pressured tech and growth stocks, whose valuations rely on future estimated cash flows that are undermined when the investors can earn more on risk-free bonds. The Russell 1000 growth index has fallen some 20% so far this year.

Meanwhile, investor sentiment is dour. The percentage of individual investors describing their six-month outlook for stocks as “bearish” rose to 59.4%, its highest level since 2009, according to the latest weekly survey from the American Association of Individual Investors.

To be sure, after the market’s recent slide, the Fed’s actions could provide some comfort. Following the Fed’s expected rate hike in March, the S&P 500 rallied more than 8% over the ensuing two weeks. Investors will keep an eye on corporate results, after a mixed week of earnings from megacap companies. Reports from Pfizer, Starbucks and ConocoPhillips are due next week, among others.

With the calendar flipping to May, seasonality also looms as a possible factor for investors. The S&P 500’s strongest six months of the year since 1946 have been November through April, when the index has risen an average of 6.8%, according to a CFRA note earlier in the week.

By comparison, the index has gained only 1.7% on average from May-October. However, more recently, the trends have not been as strong. In the past five years, the S&P 500 has averaged a 7.2% gain in the May-October period versus 5% for November-April, according to a Reuters analysis. “I don’t know how important seasonality is going to be this time around,” said Jack Ablin, chief investment officer at Cresset Capital Management.

(Reporting by Lewis Krauskopf, additional reporting by Chuck Mikolajczak, Editing by Louise Heavens and David Gregorio)