Stocks Slide as Bonds Strengthen Amid Weak Economic Data

Stocks slide as bonds advanced, driven by weak economic data that intensified concerns about the Federal Reserve potentially postponing rate cuts for too long. Treasury 10-year yields fell below 4%, while swap traders now fully expect three rate reductions this year. Data released ahead of the US jobs report indicated unemployment claims approaching a one-year high and manufacturing activity contracting the most in eight months. Despite generally favorable easing policies for Corporate America, these economic uncertainties led to a decline in equities.

Fed’s Stance on Rate Cuts and Economic Risks

Jerome Powell suggested that the Federal Reserve might cut rates in September if inflation progress is steady. However, he warned of risks related to labor market weakness. Neil Dutta of Renaissance Macro Research mentioned the “ongoing deterioration” in economic data. He cautioned that the Fed could seem behind the curve until they start cutting rates. Chris Senyek from Wolfe Research also observed labor market issues, implying that Powell might delay rate cuts too long.

Powell’s potential rate cuts are cautious; labor market weakness and worsening data may delay action, WSJ Print Subscription said.

Market Reactions and Sector-Specific Movements

Treasury 10-year yields decreased by four basis points to 3.99%, while the S&P 500 fell by 1%. Chipmaker Qualcomm Inc. experienced a decline due to concerns about a slower-than-expected recovery in the phone market, whereas Meta Platforms Inc. surged following a strong sales report. Earnings from Apple Inc. and Amazon.com Inc. will be pivotal for guiding the Nasdaq 100 after recent volatility.

Stocks Surge to Record Highs Amid Economic Resilience

Stocks surge to record highs as recent economic data signaled ongoing resilience amidst easing inflation pressures, fueling expectations…

Concerns Over Further Economic Slowdown

Thomas Ryan from Capital Economics warned that a further decline in manufacturing could lead to a loss of momentum in US growth for the third quarter. The drop in the employment index adds to concerns that the Fed might have delayed easing policy too long. Chris Zaccarelli from Independent Advisor Alliance added that a significant deterioration in the job market could prompt the Fed to cut rates more aggressively, which is being closely monitored.

Impact of Upcoming Employment Report

Economists forecast a slowdown in job growth in the July employment report due Friday. The unemployment rate is expected to stay steady at 4.1%. Vail Hartman from BMO Capital Markets notes that the data may not drastically affect the timing of the first rate cut. However, it could impact market perceptions of the Fed’s rate-cutting strategy.

Increased Focus on the Federal Reserve

The Fed remains a major focus for global investors as they try to time rate cuts. Unusually, it has also become a prominent subject in Corporate America’s post-earnings calls. A Bloomberg analysis revealed that the words “Federal Reserve” are set to be mentioned about 380 times on second-quarter analyst calls, the highest number in the database’s records dating back to 2001.

Market Sentiment and Trading Strategies

A contrarian stock indicator from Bank of America Corp. rose last month, reflecting elevated Wall Street sentiment. The gauge remains in “neutral” territory, but ultra-bearish attitudes toward equities are less impactful. Risk-on momentum in US stocks showed signs of slowing in July. Several systematic strategy funds reduced their equity exposure. Commodity trading advisers (CTAs) cut their equity positions to a two-month low in July. Chintan Kotecha from BofA Securities suggests that CTAs should reduce exposure. This is because the rally in US stocks shows signs of stalling.

Enroll now to get 77% off a 2-year digital subscription to The Financial Times and The New York Times. Enjoy unlimited access to NYTimes updates, culinary content, crosswords, The Economist Epaper, and expert analyses from top economists like Paul Krugman. Stay informed 24/7 with Financial Times’ Premium Subscription.