Stocks finished strong on Monday, with all eyes on the Federal Reserve’s upcoming June meeting, which ends on Wednesday. Treasury yields inched higher, but remain down significantly over the past month. That’s despite recent economic data showing more rapid inflation and concerns that the Fed may have to raise interest rates sooner than currently planned.
The S&P 500 ticked up 0.2% on Monday, reversing earlier losses to close at a record high. The Dow Jones Industrial Average lost 85.6 points, or 0.2%, after being down almost 300 points, and the Nasdaq Composite added 0.7%, to hit its first all-time high since April.
S&P 500 technology stocks beat the tape, closing up 1%, while materials and financials were the worst-off sectors in the index, each down at least 1%.
The discussion in markets continued to be the resiliency of government bond prices in the face of data showing accelerating consumer prices. A higher inflation rate lowers the real yield on bonds, normally pushing down their prices and lifting their nominal yields to compensate.
But after beginning the year at around 0.9% and peaking at nearly 1.75% in late March, the yield on the 10-year Treasury note has drifted lower in eight of the past 10 weeks—including a 0.18 percentage point decline in the past month.
The Federal Reserve will announce its latest monetary-policy decision on Wednesday. Whether or not officials discussed a timeline for beginning to reduce the Fed’s $120 billion-a-month bond-buying program will be the key takeaway from the meeting. The so-called “dot plot” of economic projections will also be a focus, with the previous edition showing policy makers on average predicting no interest rate hikes through 2023. Officials’ predictions of future inflation will also be interesting to watch.
“The Fed officially enters into the next policy phase this week as it begins ‘talking about talking’ about tapering,” wrote Tim Duy chief U.S. economist at SGH Macro Advisors and professor of practice at the University of Oregon. “That said, it’s still too early to expect any big announcements…Ultimately, the goal is to leave plenty of small breadcrumbs to follow such that the Fed leads market participants to the actual taper with minimal disruption to financial markets.”
The 10-year yield was back at 1.5% on Monday, up 0.04 percentage point. The 30-year Treasury bond yield also gained 0.04 percentage point, to 2.19%, while the 2-year note yield ended less than 0.01 percentage point higher, at 0.16%.
“We advise clients to stay in reflation, reopening, inflation and value trades that we expect to be boosted by a summer reopening of the global economy,” wrote Marko Kolanovic, a global markets strategist at J.P. Morgan. “This week, the FOMC will likely indicate they have talked about tapering but it is still too early to begin, and the median ‘dot’ expects a hike in 2023.”
The latest dot plot didn’t forecast any interest-rate increases until 2024. All else equal, sooner increases in the Fed’s benchmark rate justify higher bond yields today, not lower.
Lordstown Motors (ticker: RIDE) stock dropped 18.8% after its CEO and CFO resigned. A board committee found that some of the startup battery-powered truck maker’s previous statements about preorders were incorrect.
Novavax (NVAX) stock slipped 0.9% after announcing that Phase 3 trial data showed its Covid-19 vaccine to be 90.4% effective against the disease overall, and 100% effective at preventing severe cases. Moderna (MRNA) stock fell 5.2%, Pfizer (PFE) lost 1.3%, and AstraZeneca (AZN) finished flat.
Ferrari (RACE) fell 2.9% after Goldman Sachs downgraded its stock to Sell from Buy on concerns about the cost of developing an electric vehicle.
Chipotle Mexican Grill (CMG) gained 1.8% after getting upgraded to Strong Buy from Outperform at Raymond James.
Wendy’s (WEN) rose 1% after getting upgraded to Buy from Neutral at Northcoast.
Write to Ben Levisohn at firstname.lastname@example.org