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Friday indicated what investors could expect to see in the coming weeks. The benchmark S&P 500 index fell nearly 3%, while the benchmark 10-year . yield on treasure Stronger-than-expected inflation data rises to its highest level since early May after forecasts to be more aggressive irrigated Rate hike later this year. Bond yields move inversely to prices.
“Today, inflation figures were disappointing. Many of the peak expectations have now been dashed,” said Ryan Detrick, chief market strategist at LPL Financial. “Inflation fears and the potential impact of profits in Corporate America have raised concerns for investors here.”
Stocks and bonds have fallen in lockstep for most of the year as tighter Fed policy raised yields and dried up risk appetite, outpacing investors who relied on a mix of the two assets to buffer declines in their portfolios.
Those moves were partially reversed over the past few weeks, on hopes that a potential peak in inflation would allow the Fed to be less aggressive later this year.
But with markets now betting policymakers will raise rates by at least 50 basis points in their next three meetings, fewer Fed hopes are fading and investors believe more declines are on the way.
“Given that there is no sign of US price pressure easing, we suspect the Fed will soon take its foot off the brakes,” analysts at Capital Economics wrote on Friday. “So we suspect there is still more pain for the US asset markets, with Treasury yields rising further and the stock market under pressure.”
The S&P is down 18.2% year-on-year, again approaching a 20% drop from record highs that many investors consider a bear market. The yield on 10-year US government bonds – a benchmark for mortgage rates and other financial instruments – has more than doubled.
Phil Orlando, chief equity market strategist at Federated Hermes, has increased the cash position in his portfolio to 6% — the largest allocation he has ever made — while cutting holdings in bonds. In equity markets, they are overweight sectors that benefit from rising prices, such as energy.
“You have a very rough picture for the financial markets for the next several months,” he said. “Investors (have to) accept that the consensus view was wrong and that inflation is still a problem.”
Orlando sees the fear of a deadlock — a period of slow growth and high inflation — as a key market driver.
Overall, 77% of fund managers expect a deadlock in the global economy over the next 12 months, the highest level since August 2008, according to a survey by BoFA Global Research conducted ahead of Friday’s inflation data.
Hawkish view
Friday’s white-hot print – which showed consumer prices rising 8.6% in May – is prompting some Wall Street banks to anticipate that the Fed will need to raise rates in the coming months to curb inflation. How much would be needed, potentially maximizing pain for investors.
Barclays now sees policymakers delivering their first 75-basis-point increase in 28 years when they meet next week, while strategists at Goldman Sachs forecast a 50-basis-point increase in each of the next three meetings Is.
Prices for fed funds futures contracts on Friday reflect better-than-even odds of a 75-basis-point rate hike through July, with a one-in-five likelihood of a one-in-20 inflation report ahead of next week. The Fed has already raised rates by 75 basis points this year.
Meanwhile, some investors expect falling equity markets will put the Fed out of its way to fight inflation.
A BoFA Global Research poll conducted ahead of Friday’s CPI numbers showed that 34% of global bond investors believe central banks will completely ignore equities weakness, stopping only when markets turn poorly. Will be done.
Pramod Atluri, fixed-income portfolio manager at Capital Group and chief investment officer of Bond Fund of America (BFA), is among bond investors who have taken the past few weeks – a portfolio sensitive to changes in interest rates – to dialed back. ,
“I thought there was a fair chance that inflation had hit 8.5 percent, and we’d be on a continuing downward trend for the rest of this year. And that hasn’t played out,” Atluri said.
“Now we’re back to the point where we’re wondering whether two 50-basis-point increases and maybe a third 50-basis-point increase is enough.”
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