Wall Street has clearly accustomed itself to the prospect of high interest rates for longer and is more and more confident the US economy will not slide into a recession.
Having just endured its worst week this year, Wall Street stocks turned around and climbed to their biggest gain in six weeks.
That saw the S&P 500 jump 1.6% on Friday and 1.9% for the week for its first winning week in the last four.
Big gains for tech giants like Apple helped drive the Nasdaq composite to an even bigger gain of 1.97% and a smaller 1.49% rise for the week. The Dow rose 1.17% on the day and 1.47% for the week.
Eurozone shares rose 2.4% and Japanese and Chinese shares both rose 1.7%. Despite the positive global lead, the Australian share market fell 0.3% with gains in resources stocks more than offset by losses in other sectors, particularly financials and property stocks.
Oil, metal and iron ore prices all rose as did the $A with the $US down for the week.
The gains came as easing bond yields (a day after they crunched through 4% for the 10-year bond) took a little pressure off of the stock market and the US dollar.
The yield on the 10-year Treasury fell back to 3.96% from 4.06% late Thursday.
Reports on the economy were mixed, which helped to slow the swift surge in Treasury yields. The better-than-expected early month data from China also helped.
“I’d love to talk about other things, but the only things that matter are the Fed and trajectory of inflation,” said Amanda Agati, chief investment officer of PNC Asset Management.
The ASX futures market also liked it and the local market will start the week looking to build on Friday’s 63-point gain on the Share Price Index when trading resumes this morning.
Growth for US services industries last month was a touch stronger than economists expected. That’s a good sign for the economy and helps ease worries about an imminent recession, particularly when manufacturing has been struggling. But it also could add pressure on inflation.
Comforting accommodating words from Ralph Bostic, the Atlanta Federal Reserve President, in favour of a slow and steady rise in Fed rates also helped ease worries and leave markets happy with the prospect of rates higher for longer.
The US (and Australian) earnings season are all but over and ahead lies the US February jobs data on Friday and the US February inflation report tomorrow week.
That will see more volatility ahead of the Fed decision at the end of the month.
“We started off the year with a delusional, deranged or even unhinged market rally that just made no sense at all,” Agati said. “That delusion is still sitting in the background clearly, even though we are starting to get some of that reality check.”
She sees the Fed having to take interest rates even higher than the market is expecting because of how stubborn inflation has been. With corporate profits on the way down, and her expectation for even more declines because of a mild to moderate recession, she sees the stock market grinding lower before plateauing for a while and then gradually rising again, reminiscent of the shape of a bathtub.
“It’s going to be a more extended tightening cycle,” Agati said. “Investors are so conditioned to high volatility and warp speed, they want everything to happen immediately. You see the market trying to price it in in one shot. It’s just going to take longer for the Fed to get out of the driver’s seat.”
