Bank of America shares sank as bad loan repayments beat estimates, while Morgan Stanley rose as traders reported solid earnings. UnitedHealth Group led the Dow Jones Industrial Average's gains after its results.
10-year Treasury yields rose six basis points to 4.66%. The US dollar rose against all its developed market counterparts.
Powell's remarks represent a shift in his message after a third straight month in which a key measure of inflation beat analysts' forecasts. It also shows that officials see little urgency to cut rates and suggests that any reduction in 2024 may come relatively late in the year, if at all.
Fed Vice Chairman Philip Jefferson said on Tuesday that while there has been considerable progress in reducing inflation, the Fed's job of sustainably restoring inflation to 2% “is far from done “. Her counterpart in San Francisco, Mary Daly, reiterated Monday afternoon that there is no urgency to adjust interest rates, pointing to solid economic growth, a strong labor market and still high inflation.
Having started the year pricing in as many as six rate cuts in 2024, or 1.5 percentage points of relief, traders now doubt there will be even half a point of reductions. Most Wall Street economists have also cut forecasts, setting a tough scenario for US yields.
Amid all the anxiety, the widely watched MOVE index, an options-based measure of expected volatility in Treasuries, rose to its highest since January.
State Street Global Advisors is maintaining a contrarian call for the Fed to cut interest rates as soon as June, despite a series of tepid economic data that has spurred most traders to pull back on year-end bets.
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The asset manager remains confident the US central bank will begin monetary easing well before the US presidential election in November to avoid being seen to influence the outcome, according to Chief Investment Officer Lori Heinel. The backdrop of inflation still supports this move as policy works with a long lag and the quality of recent data prints has been poor, he said.
Exposure to stocks is now so high that any weakness is likely to trigger a bigger drop as investors start trimming their long positions, according to top Wall Street strategists.
Clients pulled a net $800 million ($1.25 billion) out of U.S. stocks in the five-day period to April 12 as the S&P 500 fell for the week, they said on Tuesday quantitative strategists led by Jill Carey Hall in a memo.
“There's a stock market correction going on right now driven by Middle East tensions, rising bond yields and concerns about the Fed's delayed rate cuts,” said James Demmert at Main Street Research. “The stock should have been withdrawn for quite some time.”
However, BlackRock's Robert Kapito says the stock market is poised to benefit as investors deploy their huge cash reserves.
There is nearly $9 trillion in money market funds and the same amount in cash alternatives to banks, Kapito, chairman of the world's largest asset manager, told the Asia Pacific Finance and Innovation Symposium in Melbourne on Tuesday.
“The rise in bond yields is a sign that the global economy and corporate earnings are strong and resilient,” Demmert told Main Street Research. “While this economic and corporate strength may result in fewer than expected rate cuts or even no rate cuts in the foreseeable future, that is not something that will ruin this new bull market.”
