Investors shed their fears of a hawkish Federal Reserve, according to Bloomberg’s latest Markets Live Pulse survey, signalling that slower inflation means a soft landing remains in play.
More than half of the 97 respondents to the survey said the 14% surge in the S&P 500 during 2024 will extend regardless of what the Fed does, with nearly a quarter saying central bank easing is needed for stocks to thrive. Investors were even more certain Treasuries will extend their rebound, with 62% forecasting what would be a second-straight annual gain. The Bloomberg US Treasury Index notched a decline of at least 0.8% year-to-date as of June 12.
Stocks and bonds surged before the Fed announcement, as data showed inflation slowed more than expected in May. That meant traders increased their bets the Fed will cut rates twice this year, even after the central bank’s dot plot shifted to estimate only one, quarter-point reduction for 2024, rather than the three previously pencilled in.
Fed Chair Jerome Powell welcomed the consumer price index report in his press conference after the decision. He said recent readings were “more favourable than earlier in the year”, and signalled the central bank would be ready to adjust rapidly should the labour market or price pressures soften more rapidly than expected.
“The press conference was more open-ended, with Chair Powell emphasising the importance of incoming data flow, especially on the inflation front,” said Salman Ahmed, global head of macro & strategic asset allocation at Fidelity International. “We have seen the Fed completely abandon any kind of reliance on forecasting to set policy, so we continue to foresee the current data dependency in policy and markets to remain in place.”
After the decision and Powell’s remarks, the US equity benchmark closed 0.9% higher to top 5,400 for the first time. Ten-year yields fell below 4.25% to levels not seen since early April.
Investors’ confidence in the equity market’s resilience remains focused on the artificial intelligence boom as shares of Nvidia Corp, Apple and other key mega tech companies surged higher. About half the respondents said non-tech stocks would either lag or fall further behind this year, regardless of whether borrowing costs fall. A further 34% said they would catch up only after the Fed actually starts rate cuts.
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The dramatic slowdown in inflation pressures may have helped convince survey respondents that the worst is over for bonds, especially with regard to any risk of a hawkish Fed.
The key concern for Treasuries may now be the looming prospect of greater debt issuance. A majority of survey participants expect a swelling deficit to have a significant impact on longer-term bonds, no matter what the central bank decides. The supply issue will diminish the effect of rate cuts, according to more than a third of respondents, while 22% said it will overwhelm policy action. The remainder said they are not concerned about the matter. — Bloomberg
