NEW YORK- The latest US inflation data is unlikely to ease worries over persistently high Treasury yields that have gnawed on stocks over the last few weeks, investors said, although many believe the longer-term trend of cooling consumer prices remains intact.
US consumer prices climbed by 0.6 percent in August, broadly in-line with economists expectations. In the 12-months through August, the CPI jumped 3.7 percent , though year-on-year consumer prices have come down from a peak of 9.1 percent in June 2022.
While that data does not necessarily argue for more rate increases, it did little to dispel expectations that the Federal Reserve will leave interest rates at current levels for longer than previously expected, a view that has boosted Treasury yields while dulling the allure of stocks since the equity market peaked in July.
With the S&P 500 already up over 16 percent year-to-date and stocks richly valued by some metrics, some investors believe equities from will struggle to make headway for the rest of 2023.
“As long as inflation continues to be sticky we believe that the market will face more volatility and trade sideways,” said Alex McGrath, chief investment officer for NorthEnd Private Wealth, adding that falling valuations for risk assets may be “the next shoe to drop” for the US stock market.
Futures tied to the Fed’s funds rate now show a 45 percent chance of at least one rate hike by December, up from a roughly 31 percent chance seen a month ago. Markets now anticipate that the Fed will cut rates for the first time in July 2024, compared with expectations a month ago that rates would begin falling by March.
The central bank concludes its monetary policy meeting on Sept. 20 and is expected to leave rates unchanged, though some investors believe it may deliver one more increase later this year.
Rising Treasury yields, which move in the opposite direction to bond prices, can be a stumbling block for stocks as they offer investors returns on an asset that is seen as basically risk-free because it backed by the US government. The benchmark 10-year Treasury yield was up 2 basis points on Wednesday to 4.284 percent , putting it about 6 basis points below its highest level since 2007.
The S&P 500 is down 3 percent from its July highs.
“For the bond market the move higher over the past couple of months has been in anticipation that the Fed will be in a higher for longer position, and that is putting a downward pressure on stock multiples” and increasing the risk of volatility, said Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research.
