The Federal Reserve’s pushback on expectations for interest-rate cuts over the previous two weeks has traders closing watching inflation information and piling additional cash into money-market funds.
Investors stashed a document $6.48 trillion away in U.S. money-market funds by the top of January, with the stability rising as euphoria in December over a Fed coverage pivot fizzled, in response to Crane Data.
Fed Chairman Jerome Powell first poured chilly water on aggressive expectations for fee cuts at a late January coverage assembly by indicating a March fee lower wasn’t probably. He adopted up days later with a CBS News “60 Minutes” interview, telling 6.6 million viewers that the central financial institution would tread rigorously on fee cuts as a result of inflation isn’t but convincingly tamed.
“He really put a big damper on it,” mentioned Deborah Cunningham, chief funding officer, international liquidity markets at Federated Hermes, a bunch that had $560 billion in money-market belongings as of Dec. 31. “The market got ahead of itself in November and December.”
Cautious bonds
Earlier optimism about decrease rates of interest, doubtlessly as quickly as March, helped U.S. bond funds swing to constructive returns in 2023.
Yet, many benchmark bond indexes had been again within the pink in February, with the 10-year Treasury yield
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climbing to 4.186% on Friday, the very best since mid-December.
“The equity market wouldn’t notice, but the bond market is certainly listening to Powell,” mentioned George Catrambone, head of fastened revenue at DWS Group, in a cellphone interview.
“Powell took away the punch bowl in January, but that was needed,” he mentioned. “They do need to guard against a reacceleration of inflation.”
With that backdrop, Catrambone referred to as subsequent Tuesday’s scheduled launch of the consumer-price index for January the week’s “main event,” notably after a robust January jobs report and information exhibiting a the U.S. economic system grew 3.3% within the fourth quarter.
See: The first large inflation report of 2024 is popping out. Here’s what the CPI is more likely to present.
A seasonally-adjusted CPI for the fourth quarter got here in Friday at a 3.3% annual fee, underscoring the progress the Fed has made in bringing value pressures down from a greater than 9% peak on this cycle. Still, the price of residing stays above the central financial institution’s 2% goal.
“I do think the Fed is pleased with the inflation progress thus far, but we need to see more,” Catrambone mentioned. With that backdrop, he stays an advocate of investing within the front-end of the Treasury yield curve, notably with charges on 6-month Treasury payments
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above 5% for practically a yr.
“While the bar to cut is high, the bar to raise is even higher,” Catrambone mentioned.
Read: Recession fears evaporate in new forecast of prime economists
S&P 500’s milestone
Cautious tones within the bond market in current weeks have been largely lacking from U.S. shares, with the Dow Jones Industrial Average
DJIA
and S&P 500 index each embarking on a record-setting spree to begin 2024, and the Nasdaq Composite Index not far behind.
See additionally: U.S. shares have simply achieved one thing that hasn’t occurred since 1972
Adam Hetts, international head of multiasset at Janus Henderson Investors, mentioned that staying in money could be tempting, particularly final yr when recession considerations had been on the forefront for thus lengthy.
“Investors are now expecting a Goldilocks scenario,” Hetts mentioned, a scenario the place the economic system retains rising however inflation continues to fall. Along the way in which, they probably must abdomen “hot and cold economic news.”
“Investors too focused on the recession crystal ball went into cash, enticed by high rates,” Hetts mentioned. But by avoiding shares, traders would have missed out on the S&P 500’s roughly 23% advance prior to now 12 months, in response to FactSet information.
“Cash is king for short-term liquidity needs, but being overweight cash can be toxic for long-term financial planning,” Hetts mentioned.
To that finish, he favors a extra conventional 60:40 allocation to shares and bonds, particularly given the upper yields obtainable in intermediate-duration fastened revenue to offset any turmoil that would erupt in equities that look “priced to perfection.”
The S&P 500
SPX
on Friday closed above the 5,000 mark for the primary time ever, whereas gaining 1.4% for the week to shut at a document 5,0526.61, in response to Dow Jones Market Data.
See: S&P 500 reaches 5,000 for first time. Here’s what it means for the market.
The Dow superior lower than 0.1% for the week, ending at 38,671.69, whereas the Nasdaq rose 2.3% for the week, ending at 15,990.66, solely 0.4% off its earlier document from November 2021, in response to Dow Jones Market Data.
Meanwhile, money parked in money-market funds has been incomes about 5% for a lot of months, helped alongside by the yield on the 1-month Treasury invoice
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and 3-month
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round 5.38% as of Friday, in response to FactSet.
With the brand new “realty check” in markets round rate-cut expectations this yr, Cunningham at Federated Hermes mentioned attending to a $7 trillion stability for money-market funds isn’t exhausting to think about.
Read: Magnificent Seven shares have soared, however traditionally it’s been ‘lucrative’ to wager in opposition to the largest shares
Source web site: www.marketwatch.com
