“It’s not that the rally was based on a moderate message. It was actually that Powell’s message was not terribly aggressive”said Madison Faller, global strategist at JPMorgan Private Bank. “In the short term, markets are perhaps getting a little ahead of themselves, in the sense that valuations are starting to look a little stretched,” she said.
US stocks have resumed their early 2023 rally as traders become more optimistic about the direction of the economy and expect the Fed to conclude its tightening phase soon. However, several strategists are skeptical of the rally. The performance of technology stocks, specifically, is at risk as the Nasdaq 100 index approaches a bull market and earnings estimates trend lower, with valuations rising to expensive levels compared to actual returns for stocks. bonds.
what the fed said
The president of the Federal Reserve, Jerome Powellsaid on Tuesday that strong employment data released last week affirms that the central bank has a ways to go in the process of rate hikes. The official of the monetary entity also said about the employment data for January that “We didn’t expect them to be that strong.”
Powell said the numbers “show why this is going to be a process that will take a significant amount of time,” when it comes to tightening monetary policy. The head of the Fed, on the other hand, said that we will have to wait until next year for inflation in the United States to reach 2%.
Bond yields at one-month highs
Against this backdrop, US Treasury yields traded near one-month highs on Wednesday as investors adjusted for the likelihood that the Federal Reserve raise interest rates more than expected, following a successful January jobs report.
Friday’s jobs report showed why fighting inflation “will take a long time,” Fed Chairman Jerome Powell said Tuesday, acknowledging that interest rates may have to rise more than expected if that kind of strength The economic downturn threatens the US central bank’s progress in reducing inflation.
“A strong labor market (…) increasingly raises the bar for confidence regarding the normalization of inflation,” said Jonathan Cohn of Credit Suisse in New York. “It keeps the Fed in a position where they want to lean towards the tighter until there is more clarity around the outlook.”
The benchmark 10-year bond yield was trading at 3.673%, after hitting 3.690% on Tuesday, its highest level since Jan. 6. The return on the two-year notes was at 4.465%, also its highest since January 6.
The Treasury Department will sell $35 billion of 10-year bonds on Wednesday, following a weak sale of $40 billion of three-year notes on Tuesday.
Demand for three-year bonds was likely affected by concerns that Powell would take a more aggressive tone on future rate hikes, as his comments coincided with the auction. The Treasury will also sell $21 billion of 30-year notes on Thursday.
Source: Ambito
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