Aurelia Butler

NEW YORK (Reuters) – A closely watched U.S. inflation report next week could help settle one of Wall Street’s most pressing questions: whether the market has correctly pegged the near-term trajectory for interest rates.Following last month’s banking crisis, investors have become more convinced the Federal Reserve will cut rates in the second half to ward off an economic downturn. Such bets have pushed bond yields lower, supporting the giant tech and growth stocks that hold sway over broad equity indexes. The S&P 500 has gained 6.9% so far in 2023.But the central bank’s more restrictive rate outlook sees borrowing costs remaining around current levels through 2023. That view could gain support if next week’s inflation reading shows a strong rise in consumer prices even after aggressive Fed rate hikes over the past year.“If (CPI) comes in hot, investors will start to price interest rates closer to where the Fed is and likely pressure asset prices,” said Tom Hainlin, national investment strategist at U.S. Bank Wealth Management. The firm is recommending clients slightly underweight equities, expecting interest rate hikes to hit consumer spending and corporate profits.U.S. employment data for March, released Friday, showed signs of persistent labor market tightness that could prompt the Fed to hike rates again next month. DIVERGING OUTLOOKSRecession worries are mounting, with investors betting the tumult in the banking system sparked by the March collapse of Silicon Valley Bank will tighten credit conditions and hurt growth.In the bond market, the Fed’s preferred recession indicator plunged to fresh lows in the past week, bolstering the case for those who believe the central bank will soon need to cut rates. The measure compares the current implied forward rate on Treasury bills 18 months from now with the current yield on a three-month Treasury bill.Pricing in futures markets shows investors betting that central bank easing later this year will drop the fed funds rate from 4.75% to 5% currently to around 4.3% by year-end. Yet projections from Fed policymakers show that most expect no rate cuts until 2024.”Financial markets and the Federal Reserve are reading from two different playbooks,” strategists at LPL Research said in a note earlier this week.Bets on a more dovish Fed have boosted tech and growth stocks, whose future profits are discounted less when interest rates fall. The S&P 500 technology sector has surged 6.7% since March 8, more than twice the gain for the overall index over that time.Economists polled by Reuters expect March data, due April 12, to show the consumer price index climbed by 5.2% on an annual basis, down from 6% the prior month. Markets will also watch first-quarter earnings, which start in the coming week with major banks including JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) due on Friday. Analysts expect S&P 500 earnings to fall 5.2% in the first quarter from the year-ago period, I/B/E/S data from Refinitiv showed. For some investors, the Fed’s recent interventions to stabilize the banking system may have revived hopes of a so-called Fed-put, said Mark Hackett, chief of investment research at Nationwide, referring to expectations that the central bank will take action if stocks fall too deeply, even though it has no mandate to maintain asset prices.“If the Fed was trying to protect investors, one way would be to cut rates,” Hackett said. “They haven’t done so yet, but the market is betting that they will, rightfully or wrongfully.”Still, a recession could pressure stock prices, even if it forces the Fed to cut rates sooner. Some investors worry that stock prices have not accounted for a drop in valuations and corporate earnings that would occur during a sharp slowdown.“One only needs to look back to 2001 or 2008 to see that a shift in Fed policy alone is not always enough to stop an economy on a downward trajectory or start a new bull market,” wrote Keith Lerner, co-chief investment officer at Truist Advisory Services, in a note earlier this week. “Our view is the market is now baking in a lot of good news and leaving little margin for error,” he said. More

NEW YORK (Reuters) – U.S. Treasury yields and the dollar climbed in an abbreviated session on Friday after employment data for March indicated the labor market remained tight last month, raising the odds that the Federal Reserve has at least one more rate hike in store.Wall Street exchanges were closed until Monday due to the Good Friday holiday. European markets are closed on both Friday and Monday.Nonfarm payrolls increased by 236,000 jobs last month, the Labor Department said, very close to the 239,000 expectated by economists surveyed by Reuters.Data for February was revised higher to show 326,000 jobs were added instead of 311,000 as previously reported. The unemployment rate dipped to 3.5% from 3.6% in the prior month.“The unemployment rate fell. I believe it’s the lowest since mid-2021. Year-over-year earnings slowed, but that’s kind of good news for the Fed,” said Kim Rupert, managing director of global fixed income at Action Economics in San Franciso.”Nevertheless, the data are going to keep the Fed on track for a 25-basis-point hike in May,” Rupert said.The CME’s emini S&P 500 futures contract EScv1 reversed a slight loss, closing up 0.23% shortly after the jobs report. The dollar strengthened and U.S. Treasury yields rose as expectations the Federal Reserve will hike rates at its May meeting increased.Money market traders priced in a 67% chance for a 25 basis point rate hike, up from 49.2% on Thursday, according to CME’s FedWatch Tool.MSCI’s gauge of stocks across the globe gained 0.044%.In Asia, Japan’s Nikkei share average rose on Friday, trimming its weekly decline, as a weaker yen and higher Wall Street close overnight boosted sentiment ahead of the payrolls report.”While the headline number of payrolls is still elevated, hours are being cut with the index of aggregate weekly hours falling two months in a row,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.”The employment situation has gone from red hot to merely smoldering.”Benchmark 10-year note yields were up 12.3 basis points to 3.413%, from 3.29% late on Thursday.The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 17.2 basis points at 3.993%.The dollar index rose 0.137%, with the euro down 0.09% to $1.091. More

(Reuters) – The Black unemployment rate hit a record low in March, a milestone for a U.S. labor market that most policymakers and economists expect to begin cooling in the face of higher interest rates, jeopardizing those historic gains.The Black unemployment rate tumbled to 5% last month from 5.7% in February, the Bureau of Labor Statistics said on Friday, perhaps the most notable data point in a report that at once displayed the resilience of the American job market but also the early signs of its vulnerability to the higher borrowing costs engineered by the Federal Reserve over the last year.Only a month ago, Fed Chair Jerome Powell faced withering criticism from a band of progressive Democratic lawmakers who accused him of trying to orchestrate a slowdown in hiring that would put historically vulnerable populations – Blacks in particular – at the greatest risk of job losses.The data for March shows that has not occurred, yet. The 0.7 percentage point decline in the African American unemployment rate was the largest since November 2021 and was led by Black women, for whom joblessness dropped to a record low 4.2%. The rate for Black men ticked up to 5.2% from February’s record-low-matching 5.1%.Moreover, the gap between jobless rates for whites and African Americans also narrowed to 1.8 percentage points, the lowest since the Labor Department began tracking it half a century ago.That said, with the overall U.S. jobless rate edging back down to within a whisker of its lowest level since the 1960s, this may be as good as it gets. The question is whether such low rates and differentials hold relatively steady as the job market softens in the months ahead, as most expect, or whether the gains for Blacks, Hispanics and others erode more rapidly as they have done historically during economic downturns.WARNING SIGNSIndications of late-cycle behavior are starting to accumulate. Net flows into the labor market and the labor force participation rate are both improving, developments that research shows come along late in the employment cycle.Employment in sectors often the most sensitive to cracking in the face of higher interest rates have begun flashing yellow. For instance, construction employment, surprisingly resilient given the drop in housing starts since the Fed’s rate hikes began just over a year ago, fell in March. And the manufacturing sector lost jobs as well on the heels of a decline in industrial production, one of the statistics watched closely for the onset of a recession.The bulk of job growth is now coming from the areas that are proving most nettlesome for the Fed as a source of inflation, perhaps a sign that the central bank may feel compelled to tighten conditions even further to bring the pace of price increases down. Case in point: Not only did leisure and hospitality job gains lead overall private sector employment growth, the monthly pay increase across the sector, at 0.7%, was more than double the national average.Such data again bring into focus the potential vulnerability of March’s gains for Black workers. In every U.S. recession since the 1970s the Black unemployment rate has risen by at least 2 percentage points more than for whites, and often by far more than that. More

In the three months to February loans to the non-financial sector fell overall by 3.2% year-on-year, driven down by 7.5% drop in credit to companies, the Bank of Italy said in its quarterly bulletin.The contraction in lending to firms “reflects a broad weakening in all sectors, and in particular the service sector,” the bulletin said, citing higher funding costs for banks and more stringent lending criteria.Between November and February the average interest rate on new bank loans to firms increased by 60 basis points (0.6%) to 3.6%, the central bank said.Loans to families in the three months to February edged down by 0.1% year-on-year, as demand for house mortgages declined, it added.The bulletin also estimated that the Italian economy probably posted “slight growth” in the first quarter of this year compared with the previous three months, after shrinking 0.1% at the end of last year.Statistics bureau ISTAT will issue a flash estimate of first quarter gross domestic product on April 28. More