(Bloomberg) — US stocks surged and a rally in Treasuries waned after a reading on inflation expectations eased and the Federal Reserve’s James Bullard suggested recession fears are overdone.
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The S&P 500 held onto gains of more than 2% Friday, putting it on track to clock in the best week in nearly a month. Sentiment improved further after the University of Michigan’s gauge of longer-term consumer inflation expectations settled back from an initially reported 14-year high, potentially reducing the urgency for steeper rate hikes. St. Louis Fed President Bullard, considered the biggest hawk among Fed officials, said worries over a US recession are overblown.
Traders are starting to price out any Fed action on rates beyond the December meeting, scaling back the additional tightening they expect and flirting with the possibility of cuts by in 2023. But they are still grappling with the question of what comes next if an economic downturn takes hold.
“It’s a sort of a tug of war here between concerns about a global growth slowdown and a recession and the potential that there’s already a lot of it in the price,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “Investors are considering whether or not markets are oversold at this point.”
Fed Chair Jerome Powell hardened his resolve to cool inflation in testimony to lawmakers this week, after acknowledging that a recession may be the price to pay.
Treasury yields climbed after struggling for direction earlier in the session, with the 10-year yield around 3.12%.
“The volatility in the fixed income market has been even higher than the equity market when you take the move versus the VIX,” said John Flahive, head of fixed income investments at BNY Mellon Wealth Management. “That’s been really underpinning all the uncertainty across all the capital markets and one of our catalysts needed to kind of calm down the equity market, to get a bit of a footing, would really be for the bond markets to calm down.”
Investors continued to yank cash from equity funds, which recorded their biggest outflows in nine weeks amid rising recession risk. About $16.8 billion exited global stock funds in the week through June 22, with US equities seeing their first outflow in seven weeks at $17.4 billion, Bank of America Corp. said, citing EPFR Global data.
West Texas Intermediate crude rose after retreating over the previous two sessions. Sliding raw materials prices have contributed to a moderation in market-based measures of inflation expectations.
“It would appear that the Fed has succeeded at least temporarily” in its mission to cool an overheated economy, Lewis Grant, a senior portfolio manager at Federated Hermes, wrote in a note to clients. “Commodity prices have tumbled from their highs as recession fears grow.”
Sales of new US homes jumped in May, reflecting gains in the West and South and interrupting a months-long skid as the residential real estate market adjusts to rising borrowing costs and still-elevated prices. The pickup in sales may reflect some buyers locking in their mortgage rate in anticipation of even higher borrowing costs.
Elsewhere, Bitcoin rose, hovering around its $20,000 key level. The largest digital asset is still underperforming smaller and lesser-known alternative coins such as XRP, Solana, Avalanche and Polygon that are all up more than 5% Friday. The dollar fell.
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Some of the main moves in markets:
The S&P 500 rose 2.3% as of 2:08 p.m. New York time
The Nasdaq 100 rose 2.3%
The Dow Jones Industrial Average rose 2%
The MSCI World index rose 0.4%
The Bloomberg Dollar Spot Index fell 0.2%
The euro rose 0.2% to $1.0545
The British pound was little changed at $1.2264
The Japanese yen fell 0.3% to 135.29 per dollar
The yield on 10-year Treasuries advanced four basis points to 3.12%
Germany’s 10-year yield advanced one basis point to 1.44%
Britain’s 10-year yield declined one basis point to 2.30%
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