Stocks rose Wednesday as the pressure from rising bond yields began to ease, with investors digesting inflation data and its possible impact on monetary policy.
Futures for the Dow Jones Industrial Average climbed 190 points, or 0.6%, after the index retreated 87 points on Tuesday to close at 34,220. S&P 500 futures signaled a start 0.7% into the green, with the Nasdaq poised to rise 0.9%.
The stock market recently has been under pressure from rising bond yields, which have surged as investors grapple with the likelihood that the Federal Reserve will move aggressively to tighten monetary policy. The central bank is expected to raise interest rates many times this year and next and use other tools, such as the reduction of its balance sheet through quantitative tightening, to rein in historically high inflation.
An increase in bond yields pressures stock market valuations by decreasing the extra return investors expect to get between safer bets on bonds and riskier bets on equities. Higher yields also discount the present value of future cash, meaning that stocks with valuations relying on profits years in the future — like tech stocks — are hit especially hard.
“After a succession of major bond selloffs this month, yesterday marked the first time so far in April that U.S. Treasuries put in a positive performance,” said Henry Allen, an analyst at Deutsche Bank. Bond prices move inversely to yields, so a positive performance for Treasuries means a decline in yields.
A decline in bond yields on Tuesday came amid U.S. consumer price index data for March, which showed inflation rose 8.5% on an annual basis to a new 40-year high. However, a core measure of CPI actually fell short of Wall Street’s expectations. Markets have since reevaluated how inflation could impact moves from the Fed.
“Although the total number of hikes [by the Fed] priced for the year as a whole came down somewhat, the odds of a 50 basis-point move at the next meeting in May actually ticked up to 93.5%, the highest to date,” noted Allen.
The yield on the benchmark 10-year U.S. Treasury note was down to 2.76% on Wednesday, having topped 2.82% on Tuesday. Long-duration yields remain at the highest levels since early 2019 and have risen dramatically since the end of 2021, when the 10-year note yielded 1.51%.
“The market is swinging quickly to try and price ‘peak inflation.’ The assumption is that the yield curves in places such as the [U.S.] … has already moved higher to such an extent, that their respective central banks are now just ‘filling in the gaps.’ Markets, after all, are forward-looking,” said Jeffrey Halley, an analyst at broker Oanda.
“However, it just isn’t that simple,” Halley added. “The environment for equities remains challenging.” The analyst cited the Russia-Ukraine war and ongoing Covid-19 lockdowns in China as headwinds, with uncertainty lying ahead for the coming U.S. earnings season.
The first wave of first-quarter reports kicks off on Wednesday with earnings from major U.S. financial groups JPMorgan Chase (ticker: JPM) and BlackRock (BLK). Citigroup (C), Morgan Stanley (MS), Goldman Sachs (GS), and Wells Fargo (WFC) will follow on Thursday.
Here are four stocks on the move Wednesday:
Sierra Oncology (SRRA) jumped 37% in premarket trading after pharmaceutical giant GlaxoSmithKline (GSK) agreed to buy the rare cancer therapy company for $1.9 billion in cash. Glaxo stock ticked up 0.3%.
Stellantis (STLA) rose 0.2% in the premarket after the automaker said it would sell its stake in a Chinese auto financing venture for $585 million.
LVMH (MC.France) rose 0.8% in Paris trading after the luxury goods giant reported first-quarter revenue ahead of analysts’ expectations.
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