By Saqib Iqbal Ahmed and Davide Barbuscia
NEW YORK, August 10 (Reuters) – Weaker-than-expected US inflation data bolstered investor confidence in the persistence of the double bounce in stocks and bonds in a year of steep losses for both asset classes.
Bear markets in both countries have maximized portfolio losses this year as Federal Reserve rate hikes sapped risk appetite, and some investors have greeted recent rallies in stocks and bonds with skepticism.
The S&P 500 is now up about 15% from its mid-June lows, but still down 12% year-to-date, while the Nasdaq is up more than 20% compared to its troughs. Ten-year Treasury yields, which move inversely to prices, have fallen about 70 basis points from their June high.
The consumer price index was unchanged last month after rising 1.3% in June, the Labor Department said Wednesday.
While hurdles remain for further market gains, investors said the weaker-than-expected CPI figure will likely dampen expectations about how aggressively the Federal Reserve will have to raise interest rates this year to bring inflation under control, thus strengthening the attractiveness of the two asset classes.
“This number is a huge relief because anything that stops the Fed from doing more damage is positive for all of us,” said Bryce Doty, senior portfolio manager at Sit Investment Associates.
Doty said he was increasing his exposure to longer-dated bonds in his portfolio, betting yields were unlikely to return to the highs they’ve seen this year.
A surge of optimism was evident in Wednesday’s reaction to the figure, which showed the sharpest month-on-month deceleration in price increases since 1973.
The S&P 500 climbed 2.1% while benchmark 10-year Treasury yields fell to 2.67%, before rebounding to 2.79%. Fed funds futures now show only about a 43% chance of a 75 basis point rate hike at the Fed’s September meeting, down from 63%, before the data. inflation on Wednesday, according to data from Refinitiv. FEDWATCH
The Cboe Volatility Index .VIXknown as Wall Street’s fear gauge because it reflects investor demand for downside protection in stocks, fell to its lowest level in nearly four months.
“A month doesn’t necessarily make a trend, but we’re certainly encouraged that inflation is moving in the right direction,” said Jack Ablin, chief investment officer at Chicago-based Cresset Capital.
The 60/40 Target Allocation Fund BIGPX.Owhich follows a standard portfolio technique of keeping 60% of its assets in equities and 40% in fixed income, through Tuesday rebounded around 7% from its lows after its worst first-half performance since its launch in 2006.
Further declines in bond yields and expectations of a less hawkish Fed should support a rally in many growth and technology stocks that were hit hard earlier this year. Higher interest rates generally hurt technology and growth stocks because their valuations are more dependent on future cash flows.
In addition to a surge in the tech-heavy Nasdaq, many of the so-called meme stocks favored by retail investors since last year have posted impressive rebounds.
Retail investors bought $6.9 billion net worth of stocks in the past week, down from a low of $4.2 billion in net purchases in 2022 in the week to June 24, according to data from Vanda Research.
Many investors are still reluctant to embark on stock or bond rallies. Three previous S&P 500 rebounds have faded this year, the index crashing to new lows. Big swings in Treasury markets, meanwhile, caught investors off guard.
“Our view is that we’re going to need…clear and convincing evidence that inflation is slowing, before the Fed probably loses its religion when it comes to fighting inflation,” he said. Jonathan Duensing, Head of Fixed Income at Amundi. WE.
The company estimates that 10-year yields will remain in a range between 2.75% and 3.5% over the coming months. They were recently at 2.77%.
Some Fed officials have already offered a counterpoint to expectations of a dovish central bank pivot.
Minneapolis Federal Reserve Chairman Neel Kashkari said Wednesday he stands by his view that the U.S. central bank will need to raise its key rate by 1.5 percentage points this year and more in 2023, even if this causes a recession.
Investors will see another inflation report and another payrolls number ahead of the Fed meeting in September. Producer price index data, due Thursday, may offer further clues about inflation.
Still, others think there could be more potential, at least in the short term. Michael Purves, managing director of Tallbacken Capital, said the S&P 500 could rise to 4,400 – about 5% above current levels – supported by stable earnings and recent positive economic data.
“This recommendation does not mean that we think we are off the hook,” he wrote Wednesday. However, “for the near future, we believe the risk/reward ratio is strongly in favor of the equity bulls.”
GRAPHIC: Twin declineshttps://tmsnrt.rs/3PcRQAP
(Reporting by Saqib Iqbal Ahmed and Davide Barbuscia; Additional reporting by John McCrank; Writing by Ira Iosebashvili; Editing by Howard Goller)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.