US stocks continued to rally on Wednesday because the easing of sell-offs in Treasury bonds brought respite to markets that have been experiencing fears over tightening monetary policy. The S&P 500 rose, thanks to tech stocks recovering about half of their losses this year, while megacaps led the Nasdaq 100 higher. Meta Platforms, which has been dipping in the past days, saw a slight increase yesterday.
Yields on 10-year US bonds hit a session low of around 1.91% after demand for bonds with the same maturity surged. It seems that investors are confident with the still-strong corporate earnings despite potential early tapering of economic stimulus.
But even though about 76% of companies listed in the S&P 500 reported better-than-expected earnings, the Fed could take more aggressive actions on monetary policy because US inflation is likely to extend its increase.
"Investors certainly appear encouraged by the fact that the falling-knife period looks to be in the rear-view mirror and we're now seeing signs of stabilization," said Craig Erlam, senior markets analyst at Oanda. "Of course, that could change quickly if the inflation outlook worsens, and we won't have to wait long for the next hurdle on that front, with the U.S. CPI data being keenly anticipated," he added.
Bets on the pace of rate hikes have increased since the January Fed meeting, shifting to five instead of only three that officials forecast last December. Cleveland Fed President Loretta Mester even said that rates should be raised at a faster pace, adding that she supports a first hike this March. Atlanta Fed President Raphael Bostic also said "every option is on the table."
Meanwhile, founder of 22V Research, Dennis DeBusschere, noted that "improving economic data will support risk assets unless the Fed needs to reset the outlook for financial conditions lower. Until it is clear that financial conditions need to tighten further, I will favor cyclical factors rather than defensives, especially as the economic headwinds of omicron fade and demand growth firms."
Other events to watch out for this week are:
- speech of Bank of England Governor Andrew Bailey (Thursday);
- data on US CPI, and jobless claims (Thursday).
