Traders on Wall Street, contending with an unexpected rise in U.S. inflation, observed a rebound in both stocks and bonds on Wednesday.
The prior session had experienced a downturn triggered by a reassessment of Federal Reserve rate-cut expectations, a shift further amplified by changes in the derivatives markets.
The VIX, the market’s preferred volatility gauge, saw a significant decrease after hitting its highest level since November. Treasury securities also recorded gains, primarily led by shorter maturities.
Jeremy Straub from Coastal Wealth remarked, “Investors should anticipate ongoing volatility as the market navigates the persistent uncertainty regarding the Federal Reserve’s response to the ongoing inflationary situation. The stock market never advances without occasional setbacks along the journey.”
Austan Goolsbee, President of the Federal Reserve Bank of Chicago, offered assurance, stating that a slight uptick in inflation over a few months would still be consistent with the central bank’s objective of returning to a 2% target.
Traders are now factoring in only three Fed rate cuts for the year, with roughly a 70% probability of a fourth reduction. This aligns with the central bank’s projection for three easing measures.
The S&P 500 approached the significant 5,000 mark, and the Nasdaq 100, which has a strong focus on technology stocks, witnessed an almost 1% increase.
Chipmaker Nvidia Corp. spearheaded a surge in the tech sector, while Uber Technologies Inc. soared by 12% following its announcement of plans to buy back up to $7 billion in shares.
Meanwhile, Treasury 10-year yields dipped by three basis points to 4.28%, and the dollar experienced fluctuations. In a separate market move, Bitcoin climbed above $51,000.
Matt Maley from Miller Tabak + Co. noted that while the stock market’s recovery eased concerns from Tuesday, he stressed that Treasury yields remained high. He cautioned that if yields don’t decline swiftly, it could pose challenges for stocks.
A Bloomberg index monitoring global debt has dropped 3.5% this year, wiping out gains since December 12, the day before the Fed’s announcement.
Lower-than-anticipated UK inflation figures for January brought relief to Treasuries on Wednesday, causing a drop in the U.S. 10-year yield after the prior day’s 14-basis-point increase.
Chris Senyek of Wolfe Research characterizes the current market as a “show me” narrative.
He proposes that for an official correction to occur, investors will require further proof that the Fed won’t adhere to expectations for rate cuts or that the growth outlook is decelerating rapidly enough to spark concerns about a recession.
