(Bloomberg) — A slide in bonds dragged down stocks as another weak sale of Treasuries raised concern that funding the US deficit will drive up yields at a time when the Federal Reserve is in no rush to cut rates.
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The US sold $44 billion in seven-year notes at 4.650% — above the pre-auction level of 4.637%. That’s just a day after two other offerings totaling $139 billion saw lackluster demand. Those bond sales are exerting a growing sway over several asset classes, underscoring how the uncertainties over monetary policy continue to grip markets as inflation shows little signs of moderation.
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“The “set-up’ right now is quickly becoming a concern,” said Matt Maley at Miller Tabak + Co. “Not only are yields rising again in the US, but they are moving higher in other parts of the world. That is not good news for a stock market that’s trading at 22 times forward earnings.”
All major groups in the S&P 500 fell as the gauge closed at 5,266.95. In late trading, Salesforce Inc. sank on a bearish sales outlook that fueled concerns of a slowdown at the software giant. HP Inc. reported revenue that topped estimates, including the first increase in PC sales in two years.
Treasury 10-year yields climbed six basis points to 4.61%. European bonds also tumbled, sending yields to multi-month highs after inflation in Germany quickened more than expected, denting bets on a faster pace of rate cuts. The dollar rose the most in a month.
“Bond yields may be moving higher mainly due to supply of bonds and the continued massive deficit — and not because of a concern around inflation or strong economy,” said Eric Johnston at Cantor Fitzgerald.
Worries about the US deficit — mixed with other factors — sent long-term interest rates surging in early October, with the yield on the benchmark 30-year Treasury bond touching a 16-year high.
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The US economy expanded at a “slight or modest” pace across most regions since early April and consumers pushed back against higher prices, the Fed said in its Beige Book survey of regional business contacts.
“Consumers are becoming more price-conscious, likely putting pressure on profit margins,” said Jeff Roach at LPL Financial. “We should expect more discounts and incentives as some consumers struggle with persistently high prices.”
Fed Chair Jerome Powell and his colleagues have stressed the need for more evidence that inflation is on a sustained path to their 2% goal before cutting the benchmark interest rate, which has been at a two-decade high since July.
“We continue to believe that US sovereign yields should end the year lower as inflation and economic growth slow and the Fed cuts rates in the last months of the year,” said Solita Marcelli at UBS Global Wealth Management.
Meantime, the options market is betting that the S&P 500 will see muted swings following this week’s bond auctions and the Fed’s favorite underlying inflation gauge Friday, with traders instead looking ahead to next month’s reading on consumer prices and the central bank’s upcoming meeting.
The benchmark equities gauge is implied to move just 0.5% in either direction following the personal consumption expenditures price index, based on the cost of at-the-money puts and calls, per Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy.
The reading is less than the implied move on June 7 — the next jobs report — and CPI and the Fed’s upcoming rate decision — both on June 12, which would be the largest ahead of a central bank meeting since December, Kaiser said.
Bank of America Corp. clients were net sellers of US equities for a fourth consecutive week as they offloaded $2 billion dollars worth of shares during the five-day period ended last Friday.
Outflows came chiefly from hedge funds and retail investors as institutions were net buyers, quantitative strategists led by Jill Carey Hall wrote.
Hedge funds’ exposure to US technology behemoths hit a record high following Nvidia Corp.’s estimate-thumping earnings report last week, according to Goldman Sachs Group Inc.’s prime brokerage.
The so-called Magnificent Seven companies — Nvidia, Apple Inc., Amazon.com Inc., Meta Platforms Inc., Alphabet Inc., Tesla Inc. and Microsoft Corp. — now account for about 20.7% of hedge funds’ total net exposure to US single stocks, the report showed.
Corporate Highlights:
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ConocoPhillips agreed to acquire Marathon Oil Corp. in an all-stock deal valuing the company at about $17 billion, extending a major buying spree among the largest players in the US oil and gas industry.
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Exxon Mobil Corp. pledged to be a “forceful advocate” for shareholder rights as it confronts activist investors that the oil giant accuses of abusing the US proxy voting system.
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BHP Group decided against making a firm offer for Anglo American Plc, instead walking away for now from what would have been the biggest mining deal in over a decade.
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Abercrombie & Fitch Co. shares jumped after the retailer blew past first-quarter sales estimates, extending its bounce back from the teen fashion graveyard.
Key events this week:
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Eurozone economic confidence, unemployment, consumer confidence, Thursday
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US initial jobless claims, GDP, Thursday
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Fed’s John Williams and Lorie Logan speak, Thursday
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Japan unemployment, Tokyo CPI, industrial production, retail sales, Friday
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China official manufacturing and non-manufacturing PMI, Friday
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Eurozone CPI, Friday
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US consumer income, spending, PCE deflator, Friday
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Fed’s Raphael Bostic speak, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.7% as of 4 p.m. New York time
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The Nasdaq 100 fell 0.7%
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The Dow Jones Industrial Average fell 1.1%
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The MSCI World Index fell 1%
Currencies
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The Bloomberg Dollar Spot Index rose 0.5%
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The euro fell 0.5% to $1.0802
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The British pound fell 0.5% to $1.2702
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The Japanese yen fell 0.3% to 157.69 per dollar
Cryptocurrencies
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Bitcoin fell 1.5% to $67,212.04
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Ether fell 2.1% to $3,746.43
Bonds
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The yield on 10-year Treasuries advanced six basis points to 4.61%
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Germany’s 10-year yield advanced 10 basis points to 2.69%
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Britain’s 10-year yield advanced 12 basis points to 4.40%
Commodities
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West Texas Intermediate crude fell 1% to $79.01 a barrel
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Spot gold fell 1% to $2,336.85 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Jessica Menton, Rob Verdonck, Winnie Hsu, Alex Nicholson, Farah Elbahrawy, Elizabeth Stanton, Edward Bolingbroke, Felice Maranz and Alexandra Semenova.
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