Treasuries Jump as Traders Pare Fed Bets After GDP: Markets Wrap

(Bloomberg) -- Treasuries surged after an ugly reading on the US economy fueled concern about a recession, potentially complicating the Federal Reserve’s resolve to aggressively raise rates to fight inflation.

The two-year yield sank as much as 19 basis points, while the 10-year rate slipped to the lowest since April. Swaps referencing policy meeting dates show bets the fed funds rate will peak around 3.3% before the end of 2022 -- less than 100 basis points above its current level. The S&P 500 posted mild losses, while the Nasdaq 100 underperformed as Meta Platforms Inc. reported its first-ever quarterly sales drop before Apple Inc. and Amazon.com Inc.’s results.

The drumbeat of recession grew louder after the world’s largest economy shrank for a second straight quarter as inflation undercut consumer spending and Fed hikes stymied businesses and housing. The data was released a day after the central bank raised rates by 75 basis points and Chair Jerome Powell said a similar move was possible again -- rejecting speculation the US is in recession.

“Both growth and inflation dynamics are likely to be signaling that a less aggressive approach from the Fed is required as we move into 2023,” said Hugh Gimber, global market strategist at J.P. Morgan Asset Management. “For markets, earnings forecast downgrades in order to better reflect the weaker macro backdrop still pose a risk over the coming months, but investors will take some comfort from the fact that the most aggressive moves from the Fed may now be behind us.”

For LPL Financial’s Jeffrey Roach, the Fed will likely interpret the drop in real growth as confirmation to slow down the pace of tightening. “Front-loading rate hikes eventually mean smaller hikes in the near future,” he added. Meantime, FHN Financial’s Chris Low said that based on Powell’s comments on Wednesday, officials will not stop hiking just because the economy is shrinking. 

“They need to see real progress against inflation before they stop raising rates,” Low noted. “With that in mind, this recession will get deeper before the economy starts to heal.”

Read: US Mortgages Rates Dip to 5.3% in First Decline Since Early July

Corporate Highlights:

• Hertz Global Holdings Inc. soared after the rental-car giant’s earnings beat estimates with revenue jumping on higher prices and rebound in travel.
• Harley-Davidson Inc. gained as profit and revenue beat estimates, a sign that a turnaround plan is helping the motorcycle maker overcome supply-chain headaches and a temporary production shutdown.
• Comcast Corp. sank after its prized internet business added no new customers last quarter, its worst performance in decades.
• Southwest Airlines Co. said it’s facing high costs and delays in aircraft deliveries from Boeing Co., tarnishing a quarter in which the carrier topped Wall Street’s profit expectations.

Here are some key events to watch this week:

• Euro-area CPI, Friday
• US PCE deflator, personal income, University of Michigan consumer sentiment, Friday

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Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 10:51 a.m. New York time
• The Nasdaq 100 fell 0.7%
• The Dow Jones Industrial Average was little changed
• The Stoxx Europe 600 rose 0.7%
• The MSCI World index rose 0.3%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.4% to $1.0162
• The British pound fell 0.3% to $1.2119
• The Japanese yen rose 1.4% to 134.62 per dollar

Bonds

• The yield on 10-year Treasuries declined 11 basis points to 2.68%
• Germany’s 10-year yield declined 12 basis points to 0.83%
• Britain’s 10-year yield declined eight basis points to 1.88%

Commodities

• West Texas Intermediate crude rose 0.2% to $97.47 a barrel
• Gold futures rose 1.9% to $1,769.90 an ounce

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