Treasuries Climb After US Sales on Dovish Fed Bets: Markets Wrap

(Bloomberg) — Treasuries extended their November advance as traders weighed mixed US government debt sales amid bets the Federal Reserve is done with interest-rate hikes.

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A $55 billion auction of five-year notes saw strong demand and followed a soft $54 billion sale of two-year bonds. Benchmark 10-year yields dropped six basis points to 4.4%. Stocks fluctuated after a rally that sent the market toward one of its biggest meltups of the last 100 years while putting the S&P 500 at “overbought” levels. Energy, industrial and financial shares underperformed. Amazon.com Inc. led gains in retailers as Cyber Monday kicked off.

Read: Billions Wiped Out as Stock-Safety Trade on Wall Street Misfires

The world’s biggest bond market has clawed its way back after spending chunks of 2023 underwater. Now many US debt watchers see the pathway clearing for a real revival. The Bloomberg US Treasury Index shifted earlier this month to a positive return for the year as signs of slowing inflation and measured jobs growth unleashed a rally that sent yields tumbling from their highest in more than a decade.

“The market appears to have embraced the idea that slowing economic data will hasten the arrival of market-friendly rate cuts, even though the Fed has continued to telegraph otherwise,” said Chris Larkin at E*Trade from Morgan Stanley. “This week will provide plenty of opportunities for traders to decide whether that cooling trend is intact.”

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Bets that US policymakers are done with the rate-hiking cycle have fueled a four-week, 11% S&P 500 rally, pushing short-term volatility expectations to the levels last seen in November 2021. While some used the opportunity to buy protection on the cheap, it’s been far from ubiquitous, and calls saying the market environment is getting too placid are on the rise.

“The technical backdrop in the stock market right now is critically important,” said Matt Maley, chief market strategist at Miller Tabak + Co. “This does not mean that we’re about to see an important top in the stock market. It could just mean that we’ll see a mild pullback or even a ‘sideways’ correction at some point in the next week or two to work off this overbought condition.”

Volatility has collapsed, both the bond and equity markets have stabilized, and the dollar has fallen significantly — which should be enough for investors to feel cautiously optimistic, according to Mark Hackett at Nationwide.

“At this point in the year, the direction of the current market – which is positive – is historically the direction the market finishes the year since there are few indicators that could drastically change its route,” Hackett noted. “But, in order for this to be true, we’ll need to see a ‘goldilocks’ approach from the Fed – not too weak and not too strong on policy.”

Read: Wall Street Goes All-In on Cross-Market Meltup as Bears Retreat

Strategists are moderately optimistic on stocks for 2024, but even conservative projections conceal a potentially tough ride ahead with the lagged impact of rate hikes on the economy. The preliminary average target for the S&P 500 next year was about 4,546 last week, more or less the same level where it closed on Friday. The most pessimistic projection (4,400) calls for an about 3.5% drop.

Deutsche Bank Group AG strategists led by Binky Chadha expect the benchmark to hit 5,100 by the end of 2024 — implying gains of about 12% from current levels — against a backdrop of cooling inflation and a rebound in corporate earnings.

In earnings, Crowdstrike Holdings Inc. will underscore how businesses are prioritizing cybersecurity after recent high-profile corporate hacks, while Salesforce Inc. and Dell Technologies Inc. are expected to post slower sales growth when they report this week, as overall corporate expenditure tightens.

“The markets are priced for a soft landing, and thus for consumer spending to hold up,” said Jason Draho at UBS Global Wealth Management. “We think that view will ultimately be justified. In the meantime, investors are likely to obsess over consumer spending data during the next few weeks, and any market reaction to it should be taken with a grain of salt until we know how the holiday season turned out.”

On the corporate front, US sales of new houses fell in October after a downward revision to the prior month as decades-high mortgage rates weighed on demand. The Federal Reserve Bank of Dallas manufacturing index for November came in softer than expected. Weaker data out of China also weighed on sentiment, with profits at its industrial companies rising at a much slower pace in October.

Elsewhere, gold was back above $2,000. Oil whipsawed amid easing geopolitical tensions and news Saudi Arabia is seeking OPEC+ quota cuts.

Corporate Highlights:

  • Kraft Heinz Co.’s board approves a buyback for up to $3 billion common shares of the maker of Jell-O and Oscar Mayer hot dogs.

  • Elliott Investment Management has revived calls for changes at Crown Castle Inc. after disclosing a roughly $2 billion stake in the tower operator.

  • Foot Locker Inc., a sports-apparel retailer, was downgraded to sell from neutral at Citigroup Inc.

  • Shopify Inc. said merchants set a Black Friday record with a combined $4.1 billion in sales.

  • A top-performing European fund manager is calling time on “hype” around weight-loss drugs that has sent Novo Nordisk A/S’s stock price rallying more than 50% this year.

  • Volkswagen AG signaled it’s willing to push for staff reductions at its namesake brand to reduce expenses and improve profitability.

  • Bayer AG hired several teams of bankers for a strategy simulation game that studied various breakup scenarios, according to people familiar with the matter. Their conclusion: Sweeping changes to the troubled German conglomerate won’t be easy.

  • Alibaba Group Holding Ltd. has shuttered its quantum computing research lab, a sign that the Chinese e-commerce and cloud operator is considering more cutbacks to bulk up the bottom line.

Key events this week:

  • Meeting of NATO foreign ministers in Brussels, Tuesday-Wednesday.

  • ECB governing council member Pablo Hernandez de Cos and Bank of England Deputy Governor Dave Ramsden speak, Tuesday

  • US Conference Board consumer confidence, Tuesday

  • Fed Governor Chris Waller speaks, Chicago Fed President Austan Goolsbee speak, Tuesday

  • New Zealand rate decision, Wednesday

  • OECD releases biannual economic outlook, Wednesday

  • Eurozone economic confidence, consumer confidence, Wednesday

  • Germany CPI, Wednesday

  • Bank of England Governor Andrew Bailey speaks, Wednesday

  • US wholesale inventories, GDP, Wednesday

  • Cleveland Fed President Loretta Mester speaks, Wednesday

  • Fed releases its Beige Book, Wednesday

  • China non-manufacturing PMI, manufacturing PMI, Thursday

  • OPEC+ meeting, Thursday

  • Eurozone CPI, unemployment, Thursday

  • US personal income, PCE deflator, initial jobless claims, pending home sales, Thursday

  • Dell earnings, Thursday

  • China Caixin Manufacturing PMI, Friday

  • Eurozone S&P Global Manufacturing PMI, Friday

  • US construction spending, ISM Manufacturing, Friday

  • Fed Chair Jerome Powell to participate in “fireside chat” in Atlanta, Friday

  • Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 was little changed as of 1:28 p.m. New York time

  • The Nasdaq 100 rose 0.2%

  • The Dow Jones Industrial Average fell 0.2%

  • The MSCI World index fell 0.1%

Currencies

  • The Bloomberg Dollar Spot Index was little changed

  • The euro was little changed at $1.0938

  • The British pound was little changed at $1.2613

  • The Japanese yen rose 0.4% to 148.84 per dollar

Cryptocurrencies

  • Bitcoin fell 1.5% to $37,066.07

  • Ether fell 2.7% to $2,018.4

Bonds

  • The yield on 10-year Treasuries declined six basis points to 4.40%

  • Germany’s 10-year yield declined 10 basis points to 2.55%

  • Britain’s 10-year yield declined seven basis points to 4.21%

Commodities

  • West Texas Intermediate crude fell 0.3% to $75.31 a barrel

  • Spot gold rose 0.5% to $2,011.26 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Matthew Burgess, Tassia Sipahutar, Pearl Liu, Alex Nicholson, Elena Popina and Tatiana Darie.

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