(Bloomberg) — Wall Street traders pushed stocks lower and bond prices higher after the latest economic data suggested momentum was slowing.
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The data, released just 24 hours before the Federal Reserve’s preferred price gauge, showed the pace of U.S. growth slowed as spending and inflation both fell. The slowing economy means regulators have room to cut interest rates this year, but that could be a concern for consumption and, ultimately, corporate profits.
“Today’s economic data is a double-edged sword,” said Chris Zaccarelli of the Independent Advisor Alliance.
Read: Traders say S&P 500 price movements cause minimal disruption
In New York on Thursday morning, the S&P 500 and Dow Jones Industrial Average experienced problems with real-time prices not changing for more than an hour. Individual stocks and exchange-traded funds continued trading normally throughout the day, and that, along with futures trading, helped traders weather the turmoil.
“It wasn’t a concern when it was announced,” said Mike Zigmont of Harvest Volatility Management. “The futures were still trading, so you could use that to gauge the SPX levels. Most savvy traders didn’t care.”
The S&P 500 fell to around 5,250 on a decline in tech stocks. Salesforce slumped on a weak outlook. Dell Technologies reports earnings after the close. The 2-year Treasury yield fell 5 basis points to 4.92%. The dollar weakened.
Read: The Fed Thinks It’s Fighting Inflation. Think Again: Bill Dudley
New York Fed President John Williams said he expects inflation to continue to fall in the second half of the year, adding that rising borrowing costs are holding back the economy.
Zaccarelli said he has long believed the economy is more important than lower interest rates to support stock prices.
“Of course, they are interrelated because, all things being equal, the economy would be more likely to avoid a recession if interest rates were lower than they are now. But at the end of the day, what matters most in the medium to long term is continued economic expansion and corporate profits,” he noted.
His base case for this year is that inflation will remain relatively strong and the Fed will remain on the sidelines for most (if not all) of 2024, while the economy will keep expanding and corporate profits will keep growing.
“Hence, the stock market should maintain its bull run despite occasional pullbacks along the way,” he noted.
“It was positive data for bonds,” said Ian Lingen at BMO Capital Markets. “We expect rates to move lower throughout the day as investors adjust positions ahead of Friday’s core PCE update and the end of the month.”
The Federal Reserve’s frontline inflation gauge is trying to point to some easing from stubborn upward price pressures, underscoring the central bank’s caution about the timing of interest rate cuts.
Economists expect the personal consumption expenditures price index excluding food and energy, due on Friday, to rise 0.2% in April, the smallest increase so far this year for the measure that gives a better snapshot of underlying inflation.
“Inflation and interest rates remain key, and despite expectations of a downward revision to GDP, today’s data was nothing to shake the status quo,” said Chris Larkin of Morgan Stanley’s E*Trade. “Keep an eye on the PCE price index tomorrow as it could dictate sentiment leading up to the jobs report next Friday.”
Signs that the economy has cooled enough to pave the way for interest rate cuts, combined with robust corporate earnings, create a favorable environment for stocks.
That’s according to an analysis by Bank of America strategists who looked at data going back to 1950 and concluded that in historical quarters when economic growth slowed and corporate earnings rose, the S&P 500 rose an average of 3.6% — faster than the average 2% increase when both corporate earnings and U.S. gross domestic product rose.
Company Highlights:
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Bank of America Chief Executive Officer Brian Moynihan said the bank’s sales and trading division expects second-quarter revenue to grow in the low single digits, while its investment banking division is on track to post a 10% to 15% increase from the same period last year.
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HP reported quarterly revenue that beat analysts’ expectations, including the first increase in PC sales in two years, a positive sign for a long-awaited market recovery.
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Best Buy Co. reported better-than-expected first-quarter profit even as sluggish sales deepened and consumers continued to hold back on electronic purchases.
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Birkenstock Holdings Inc. reported strong profits and raised its full-year forecast as consumers rushed to buy luxury sandals and clogs, sending its shares up their biggest gains ever.
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WeWork Inc. received bankruptcy court approval to shave billions of dollars off its debt, unwind unprofitable leases from its portfolio of office workspaces and preserve the legacy of co-founder Adam Neumann.
Major events this week:
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Japan unemployment rate, Tokyo consumer price index, industrial production, retail sales, Friday
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China manufacturing and non-manufacturing PMI, Friday
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Eurozone Consumer Price Index, Friday
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U.S. Consumer Income, Expenditures and PCE Deflator Friday
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Federal Reserve President Raphael Bostic to speak on Friday
Some of the key market developments:
stock
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The S&P 500 was down 0.3% as of 2:19 p.m. New York time.
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The Nasdaq 100 fell 0.6%.
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The Dow Jones Industrial Average fell 0.8%.
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The MSCI World Index was little changed
currency
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The Bloomberg Dollar Spot Index fell 0.3%.
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The euro rose 0.3% to $1.0836.
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The British pound rose 0.3% to $1.2735.
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The Japanese yen rose 0.5% to 156.82 yen to the dollar.
Cryptocurrency
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Bitcoin rose 2.7% to $69,252.66.
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Ether rose 1.5% to $3,804.23.
Bonds
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The yield on the 10-year Treasury note fell 6 basis points to 4.55%.
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German 10-year government bond yields fell 4 basis points to 2.65%.
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UK 10-year government bond yields fell 5 basis points to 4.35%.
merchandise
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West Texas Intermediate crude fell 1.5% to $78.08 a barrel.
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Spot gold rose 0.2% to $2,341.89 an ounce.
This story was produced with assistance from Bloomberg Automation.
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