Bloomberg: Tech stocks led the way lower on Wednesday as the most recent string of Federal Reserve speakers reinforced the idea that interest rates will need to keep rising to quash inflation.
While that’s all going to be data-dependent as Jerome Powell has signaled, the reality is markets are still very vulnerable to rate volatility, said Nicholas Colas at DataTrek. Fed Bank of New York President John Williams noted peak rate forecasts are still “very reasonable,” adding that policy may need to be restrictive for a few years. Fed Governor Lisa Cook echoed his comments, saying: “we are not done yet.”
Traders continued buying a put spread in Secured Overnight Financing Rate options targeting a 6% Fed policy rate by September. That’s almost a full percentage point more than the 5.1% level for that month currently priced into swaps. The Fed benchmark currently sits between 4.5% and 4.75%.
Also Read: US CPI calculation to change for January inflation data
“Even though we shifted early this year from ‘cautious’ to ‘cautiously constructive,’ adding back to stocks for the first time in 18 months, we continue to expect market volatility ahead as news flow on earnings, inflation, the economy and Fed bounces from bullish to bearish and back again,” wrote Stephen Auth, chief investment officer of equities at Federated Hermes.
The recent rally in stocks in the face of worsening earnings and economic expectations has produced “massive disconnects” that threaten market stability, warned Lisa Shalett at Morgan Stanley Wealth Management.
While the mismatch is increasingly framed as a sign that the market is predicting a soft landing for the economy despite the Feds ongoing tightening, Shalett is skeptical. She attributed the latest equity rally to potentially short-term technical factors, such as short sellers buying back stocks to cover bearish positions and the seasonal tendency of investors to flock to the market’s biggest losers from the previous year.
The S&P 500 came back down following a rally that recently put the benchmark in overbought territory. The Nasdaq 100 underperformed, with Google’s parent Alphabet Inc. tumbling about 7% and other big names like Apple Inc. and Amazon.com Inc. weighing heavily on the megacap space. Yet a rally in Microsoft Corp. had the software giant’s market value topping $2 trillion.
