Updated at 2:42 pm EST
U.S. stocks extended gains Monday, while the dollar extended declines against its global peers and Treasury yields stabilized, as markets looked to a cautious start to a crucial week of Fed rate signaling following one of the worst runs for domestic stocks in two decades.
Growth and inflation bets continue to dominate investor sentiment as many of the underlying forces driving near-term inflation, such as Russia’s war on Ukraine, China’s Covid crisis and disrupted global supply chains, persist while the Federal Reserve vows to snuff out the fastest acceleration in consumer prices in more than four decades with aggressive rate hikes.
The impact of that strategy on stocks has been clear: the S&P 500 suffered through another five-day loss last week, taking its run of consecutive weekly declines to eight, the longest losing streak since 2001. The Dow, meanwhile, is also on an eight-week run of declines that the market hasn’t seen in nearly a century.
Still, the Atlanta Fed’s GDPNow forecasting tool pegs current U.S. growth at 2.4%, a tally that would indicate a sharp rebound from last quarter’s contraction and suggest that a solid economy underpins the domestic stock market weakness.
That leaves open the question of a so-called Fed put, a reference to an investing technique that limits downside losses: if growth remains consistent, yet stocks continue to slump, the central bank may pause its current rate-hike cycle to allow equity valuations to recover.
Little evidence of that so-called ‘Fed put’ can be found in the CME Group’s FedWatch tool, however, as rate traders continue to bet on a 96.6% chance of a 50 basis point rate hike next month, while placing a 91.1% probability on a similar-sized move in July.
Fed Chairman Jerome Powell has attempted to take the prospect of a 75 basis point rate hike off the take for both the June and July meetings, but traders are still pricing in at least a 10% chance of such a move before the end of the summer.
Minutes of the April meeting, which will be published Wednesday at 2:00 pm Eastern, could provide guide to that view, particularly if Friday’s reading of the Fed’s preferred inflation gauge, the core PCE Price index, comes in hotter than the market’s 0.3% forecast. The data will arrive at 8:30 am Eastern time.
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The Commerce Department will also publish its second look at first quarter GDP on Thursday at 8:30 am Eastern, with economists looking for a modest uptick from its initial estimate of a 1.4% contraction.
In overseas markets, stocks were briefly rattled by comments from President Joe Biden that the U.S. would be prepared to use force to protect Taiwan from any invasion by China, a a remark that overshadowed his unveiling of a new ‘Indo-Pacific Economic Framework’ in Tokyo.
The region-wide MSCI ex-Japan index was marked 0.11% lower by the end of the session, while Europe’s Stoxx 600 closed 0.96% higher despite unusually direct comments from European Central Bank President Christine Lagarde that indicated rate hikes are likely to begin later this summer.
In the U.S., benchmark 10-year Treasury bond yields rose 4 basis points to 2.86% while and the dollar index fell 0.95% against a basket of six global currencies to 102.138 in early New York trading.
On Wall Street, futures tied to the Dow Jones Industrial Average was marked 630 points higher in early Monday trading while the S&P 500, which is down 18.14% for the year, gained 74 points. The tech-focused Nasdaq was up 175 points.
VMware (VMW) – Get VMware, Inc. Class A Report shares were an active name in early trading, surging more than 18% amid reports that the former cloud computing division of Dell Technologies (DELL) – Get Dell Technologies Inc Class C Report is a takeover target of chipmaker Broadcom (AVGO) – Get Broadcom Inc. Report.
JPMorgan (JPM) – Get JPMorgan Chase & Co. Report shares rose 4% after the banking giant boosted its full-year forecast for a key profit metric and said the U.S. economy remains ‘fundamentally strong’.
Tesla (TSLA) – Get Tesla Inc Report shares pared earlier pre-market gains, falling 1.44%, following a report that suggested the carmaker will delay the return to full capacity at its Shanghai gigafactory by at least another day.
Zoom Video Communications (ZM) – Get Zoom Video Communications, Inc. Class A Report shares were also in focus, falling 2.22% ahead of the video conferencing specialists first quarter earnings after the close of trading.
Analysts are looking for Zoom to publish a 12% increase in first quarter revenues, which are forecast at $1.07 billion, but see rising costs eat into its bottom line, which is expected to fall 34% to 87 cents per share.