(Bloomberg) — Wall Street traders boosted stocks as bond yields fell after a series of weaker-than-expected economic data strengthened the case for the Federal Reserve to start cutting interest rates later this year.
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In shortened trading hours ahead of a U.S. holiday, the S&P 500 hit a record high on bets that low interest rates will continue to fuel U.S. businesses. Treasury bonds rose broadly. The dollar remained weak after minutes of the Fed’s June policy meeting showed officials were divided on how long to keep interest rates high as they wait for evidence that inflation is subsiding.
Paul Ashworth of Capital Economics said the Fed minutes “feel outdated” given subsequent signs of an economic slowdown. Michael Feroli of JPMorgan Chase & Co. called the minutes “dovish.” There was broad agreement, he noted, that deflationary pressures are prevalent, labor market tightness has eased and growth in economic activity will continue to moderate.
Data released ahead of Friday’s jobs report showed the services sector contracted at its fastest pace in four years, signalling a further weakening in the labor market.
“Bad news is good news,” said Fawad Razakzada of City Index and Forex.com. “That’s how risk assets reacted following the U.S. data release today.”
Investors continue to closely monitor the political situation, with Joe Biden struggling to stave off pressure to abandon his reelection bid. Two key post-debate polls have shown Donald Trump widening his lead over Biden.
The S&P 500 rose above 5,535, its 33rd record high of 2024. Tesla Inc. rose for the seventh straight trading day, leading gains among large-cap stocks, while Amazon.com Inc. fell. The 10-year Treasury yield fell 7 basis points to 4.36%. The dollar weakened.
“Despite cloudy conditions on the macro front, investor optimism continues to drive markets higher,” said Nationwide’s Mark Hackett.
Brown Brothers Harriman’s Win Thin and Elias Haddad wrote that a September Fed rate cut is “highly likely” if the data cooperates. Swaps traders are expecting almost two rate cuts in 2024, with the first in November, but bets on a September cut are growing.
Economists expect nonfarm payrolls to fall by 190,000 in June from the previous month and the unemployment rate to remain at 4 percent.
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“Given other evidence that economic conditions are cooling, the jobs data could become increasingly crucial as the Fed looks for a reason to cut rates,” said Quincy Krosby of LPL Financial.
According to a survey conducted by 22V Research, 40% of investors believe the market’s reaction to Friday’s employment report will be “negligible/mixed,” with 34% describing it as “risk-on” and 26% describing it as “risk-off.”
“Investors are most focused on the jobs report,” said Dennis Debusschere of 22V. “Wage growth has become a little less of a focus.”
The 22V survey also showed that there is an “upward trend” in unemployment rate assumptions.
Federal Reserve Chairman Jerome Powell said Tuesday that the latest economic data suggests inflation is trending downward again, but stressed that officials need more evidence before cutting interest rates. Asked what keeps him up at night, he pointed to the delicate balance between containing inflation and avoiding a big downturn in the labor market.
“Until employment weakens significantly, fundamental support remains for the U.S. economy, but there are some signs of slowing,” said Don Rissmiller at Strategas. “Fed members have signaled they would like to see further improvement in inflation. Fortunately, the U.S. economy still looks strong enough at this point to support an extended pause on rate hikes, but the clock is ticking.”
Meanwhile, New York Fed President John Williams, who has studied the natural rate of interest, known as R-star, in depth, pushed back against recent commentary that suggests the natural rate has risen since the pandemic.
The idea of the long-run natural rate of interest, which prevails when the economy is unresponsive to shocks and growing at its potential rate, is central to monetary policy but cannot be directly observed, and authorities aim to raise interest rates above neutral levels to cool the economy and fight inflation.
Company Highlights:
Novo Nordisk’s best-selling diabetes and weight-loss drugs, Ozempic and Wegovy, appear to be associated with an increased risk of a rare form of vision loss, according to an analysis by doctors at Massachusetts Eye and Ear Infirmary, affiliated with Harvard University Hospital.
Paramount Global surged after its merger deal with independent film and TV production company Skydance Media was revived.
Nvidia Chief Executive Jensen Huang sold $169 million worth of stock in June, his biggest one-month profit ever, and insatiable demand for chips used to power artificial intelligence has sent the company’s shares to new highs.
Jeff Bezos said he plans to sell an additional 25 million shares of Amazon.com Inc. stock, worth $5 billion, on the day the company’s stock hit a new high.
Lyft, the company that runs the popular Citi Bike program, has announced that it will raise the prices of electric bike rentals in New York City by 20%, citing higher-than-expected operating costs.
Ford Motor Co.’s sales of F-Series pickup trucks fell in the second quarter as the company gradually redesigns its flagship model to avoid quality problems and recalls.
Southwest Airlines has introduced a shareholder rights plan to counter pressure from activist firm Elliott Investment Management to overhaul its management team.
LL Flooring Holdings Inc. is considering filing for Chapter 11 bankruptcy protection, said a person familiar with the matter who asked not to be identified discussing private deliberations.
Major events this week:
UK general election on Thursday
US Independence Day holiday, Thursday
Eurozone retail sales on Friday
US jobs report, Friday
Fed President John Williams to speak Friday
Some of the key market developments:
stock
currency
The Bloomberg Dollar Spot Index fell 0.2%.
The euro rose 0.4% to $1.0785.
The British pound rose 0.4% to $1.2740.
The Japanese yen weakened 0.2% to 161.72 yen to the dollar.
Cryptocurrency
Bitcoin fell 3.6% to $59,706.51.
Ether fell 4.2% to $3,272.14.
Bonds
The yield on the 10-year Treasury note fell 7 basis points to 4.36%.
German 10-year government bond yields fell 2 basis points to 2.59%.
UK 10-year government bond yields fell 8 basis points to 4.17%.
merchandise
West Texas Intermediate crude rose 1.1% to $83.72 a barrel.
Spot gold rose 1.1% to $2,354.66 an ounce.
This story was produced with assistance from Bloomberg Automation.
–With assistance from John Viljoen, Sujata Rao, and Winnie Hsu.
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