Stocks Climb on Bets Fed, ECB Closer to Rate Cuts: Markets Wrap

(Bloomberg) — Stocks hit all-time highs in the run-up to the US jobs report, with investors betting some of the world’s major central banks will start slashing interest rates as soon as June.

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Those wagers emboldened equity bulls expecting lower borrowing costs will fuel corporate profits. While tech remained in the leadership position, an equal-weighted version of the S&P 500 — where the likes of Nvidia Corp. carry the same heft as Dollar Tree Inc. — hovered near a record. That gauge is less sensitive to gains from the largest companies — providing a glimpse of hope that the rally will broaden out.

Treasury two-year yields declined alongside the dollar after Jerome Powell said the Federal Reserve is “not far” from the level of confidence needed to ease monetary policy. He noted that interest-rate reductions “can and will begin” this year. The Fed chief also remarked he could see the case for shortening maturity of central-bank holdings. 

Across the Atlantic, European Central Bank President Christine Lagarde indicated officials may be in a position to ease policy in June. Just like the Fed, the ECB is contemplating when to sound the all-clear on inflation and begin undoing the unprecedented monetary tightening deployed to subdue it.

“Risk assets continued to surge after major central bank officials provided the strongest hints yet that monetary policy will be loosened soon,” said Fawad Razaqzada at City Index and Forex.com.

The S&P 500 rose 1% — extending this year’s advance to about 8%. That’s double the pace of its equal-weighted version, validating concerns about gains remaining concentrated in a narrower group of shares. In late hours, Broadcom Inc. reported disappointing revenue from its semiconductor business, even as it said AI is helping fuel demand.

Just 24 hours before the all-important US payrolls report, data showed jobless claims held at historically low levels last week — the latest evidence of a resilient labor market.

The government’s monthly employment is forecast to show a pullback in hiring and wage growth in February — after both advanced significantly in the previous month. Economists expect US employers to have added 200,000 jobs last month.

“Barring any major surprises on the job creation or unemployment fronts, we’re of the mind investors’ primary focus will be on “average hourly earnings’,” said Vail Hartman at BMO Capital Markets. “After all, inflation outweighs job creation amid the current balance of risks.”

Gina Bolvin, president of Bolvin Wealth Management Group, bets the most-important item in Friday’s report will indeed be wages — and if they are climbing too quickly. If they are moving up too fast, companies will pass this this cost to the end user which is inflationary, she noted.

“The markets have declined on inflationary data, however it has recovered quickly,” Bolvin added. “It’s a constant buy-the-dip mentality mostly because earnings growth and estimates have been strong.”

A survey conducted by 22V Research shows that 50% of investors think the payroll data will be “risk-on,” 34% said mixed/negligible, and only 16% expect a “risk-off” reaction.

Fed Bank of Cleveland President Loretta Mester said that the central bank should be able to start cutting rates later this year, though she first wants to see more evidence that inflation is cooling further.

Global bond markets are facing significant challenges as governments and companies have to refinance about 40% of maturing debt in the coming three years, potentially at higher costs, according to the Organization for Economic Cooperation and Development.

In a report published Thursday, the Paris-based organization estimated that total government debt issued by its 38 member countries will rise by $2 trillion to a record of $56 trillion this year.

“It is clear that pressure is mounting on major central banks to lower interest rates due to the rising debt burden in the US and other developed economies,” Razaqzada also noted. “Concerns arise over the ability of these nations to sustain high interest rates, as increased debt servicing costs coincide with the potential for an economic downturn, necessitating further borrowing at elevated rates.”

While Lagarde said officials aren’t “sufficiently confident” at present to commence monetary easing, there’s a definite slowdown in consumer prices. “We will know a little more in April, but we will know a lot more in June,” she noted. 

The ECB’s latest quarterly outlook offered reassurance, putting inflation at 2.3% this year — from 2.7% in December — and revising the 2025 forecast down to 2%.

Data between now and June could certainly move the dial — but the only “real take-away” from the ECB decision and press conference was to reinforce an intended first June cut, according to TD Securities’ strategists.

“The ECB appears to be on track towards initiating an easing cycle perhaps in June,” said Quincy Krosby at LPL Financial. “Given the continuing weakness in Germany, the ECB will want to move as soon as is prudent — but will also be led by confidence that inflation has been quelled and moving closer to its 2% target.”

Corporate Highlights:

• Gap Inc. reported fourth-quarter earnings that exceeded expectations, a sign that efforts to turn the storied apparel retailer around are bearing fruit.
• US investigators are looking into another incident involving Boeing Co.’s 737 Max airliner, a case in which the plane’s rudder system malfunctioned as pilots were landing.
• United Airlines Holdings Inc. is slowing pilot hiring and suspending training classes for new aviators after pulling the Boeing Co. Max 10 aircraft from its flight plans for this year.
• General Electric Co.’s aerospace division set plans to return more of its profits to shareholders, including restoration of a significant dividend as it accelerates earnings as an independent company.
• Rivian Automotive Inc. is halting plans to build a new multibillion-dollar factory in Georgia, an abrupt reversal aimed at cutting costs while the company prepares to launch a cheaper electric vehicle.

Key Events This Week:

• Eurozone GDP, Friday
• US nonfarm payrolls, unemployment, Friday
• New York Fed President John Williams speaks, Friday
• ECB Governing Council member Robert Holzmann speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1% as of 4 p.m. New York time
• The Nasdaq 100 rose 1.6%
• The Dow Jones Industrial Average rose 0.3%
• The MSCI World index rose 1%

Currencies

• The Bloomberg Dollar Spot Index fell 0.4%
• The euro rose 0.4% to $1.0947
• The British pound rose 0.6% to $1.2809
• The Japanese yen rose 0.9% to 148.08 per dollar

Cryptocurrencies

• Bitcoin rose 1.8% to $67,699.9
• Ether rose 2.3% to $3,939.05

Bonds

• The yield on 10-year Treasuries declined one basis point to 4.09%
• Germany’s 10-year yield declined two basis points to 2.31%
• Britain’s 10-year yield was little changed at 4.00%

Commodities

• West Texas Intermediate crude fell 0.3% to $78.90 a barrel
• Spot gold rose 0.5% to $2,158.86 an ounce

This story was produced with the assistance of Bloomberg Automation.

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