The Federal Reserve’s pushback on expectations for interest-rate cuts over the previous two weeks has traders closing watching inflation knowledge and piling more money into money-market funds.
Investors stashed a file $6.48 trillion away in U.S. money-market funds via the top of January, with the steadiness rising as euphoria in December over a Fed coverage pivot fizzled, in accordance with Crane Data.
Fed Chairman Jerome Powell first poured chilly water on aggressive expectations for fee cuts at a late January coverage assembly by indicating a March fee reduce wasn’t possible. He adopted up days later with a CBS News “60 Minutes” interview, telling 6.6 million viewers that the central financial institution would tread rigorously on fee cuts as a result of inflation isn’t but convincingly tamed.
“He really put a big damper on it,” stated Deborah Cunningham, chief funding officer, world liquidity markets at Federated Hermes, a gaggle that had $560 billion in money-market property as of Dec. 31. “The market got ahead of itself in November and December.”
Earlier optimism about decrease rates of interest, doubtlessly as quickly as March, helped U.S. bond funds swing to optimistic returns in 2023.
Yet, many benchmark bond indexes had been again within the pink in February, with the 10-year Treasury yield
climbing to 4.186% on Friday, the best since mid-December.
“The equity market wouldn’t notice, but the bond market is certainly listening to Powell,” stated George Catrambone, head of mounted earnings at DWS Group, in a telephone interview.
“Powell took away the punch bowl in January, but that was needed,” he stated. “They do need to guard against a reacceleration of inflation.”
With that backdrop, Catrambone referred to as subsequent Tuesday’s scheduled launch of the consumer-price index for January the week’s “main event,” notably after a powerful January jobs report and knowledge exhibiting a the U.S. financial system grew 3.3% within the fourth quarter.
See: The first large inflation report of 2024 is popping out. Here’s what the CPI is prone to present.
A seasonally-adjusted CPI for the fourth quarter got here in Friday at a 3.3% annual fee, underscoring the progress the Fed has made in bringing value pressures down from a greater than 9% peak on this cycle. Still, the price of dwelling stays above the central financial institution’s 2% goal.
“I do think the Fed is pleased with the inflation progress thus far, but we need to see more,” Catrambone stated. With that backdrop, he stays an advocate of investing within the front-end of the Treasury yield curve, notably with charges on 6-month Treasury payments
above 5% for almost a 12 months.
“While the bar to cut is high, the bar to raise is even higher,” Catrambone stated.
Read: Recession fears evaporate in new forecast of high economists
S&P 500’s milestone
Cautious tones within the bond market in latest weeks have been largely lacking from U.S. shares, with the Dow Jones Industrial Average
and S&P 500 index each embarking on a record-setting spree to begin 2024, and the Nasdaq Composite Index not far behind.
See additionally: U.S. shares have simply completed one thing that hasn’t occurred since 1972
Adam Hetts, world head of multiasset at Janus Henderson Investors, stated that staying in money might be tempting, particularly final 12 months when recession considerations had been on the forefront for thus lengthy.
“Investors are now expecting a Goldilocks scenario,” Hetts stated, a scenario the place the financial system retains rising however inflation continues to fall. Along the way in which, they possible have to abdomen “hot and cold economic news.”
“Investors too focused on the recession crystal ball went into cash, enticed by high rates,” Hetts stated. But by avoiding shares, traders would have missed out on the S&P 500’s roughly 23% advance up to now 12 months, in accordance with FactSet knowledge.
“Cash is king for short-term liquidity needs, but being overweight cash can be toxic for long-term financial planning,” Hetts stated.
To that finish, he favors a extra conventional 60:40 allocation to shares and bonds, particularly given the upper yields accessible in intermediate-duration mounted earnings to offset any turmoil that would erupt in equities that look “priced to perfection.”
The S&P 500
on Friday closed above the 5,000 mark for the primary time ever, whereas gaining 1.4% for the week to shut at a file 5,0526.61, in accordance with Dow Jones Market Data.
See: S&P 500 reaches 5,000 for first time. Here’s what it means for the market.
The Dow superior lower than 0.1% for the week, ending at 38,671.69, whereas the Nasdaq rose 2.3% for the week, ending at 15,990.66, solely 0.4% off its earlier file from November 2021, in accordance with Dow Jones Market Data.
Meanwhile, money parked in money-market funds has been incomes about 5% for a lot of months, helped alongside by the yield on the 1-month Treasury invoice
round 5.38% as of Friday, in accordance with FactSet.
With the brand new “realty check” in markets round rate-cut expectations this 12 months, Cunningham at Federated Hermes stated attending to a $7 trillion steadiness for money-market funds isn’t exhausting to think about.
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