Daily Comment (April 25, 2024)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equities are taking a tumble early in the trading session as Meta’s earnings outlook dampens investor optimism. On the sports front, the Miami Heat have tied the series against the Boston Celtics. Today’s Comment explores why Treasury yields might face continued pressure despite recent strength. We also examine the role of US shale production in tempering oil price surges and analyze the escalating rivalry between the EU and China. As always, we’ll wrap up with a summary of important domestic and international data releases.

Appetite for Treasurys? Treasury allure persists despite oversupply fears and Fed unknowns, but its longevity is in question.

  • Demand for U.S. Treasurys held steady even as the government sold a hefty $70 billion in 5-year notes on Wednesday. The auction yield came in at 4.659%, 4 basis points higher than anticipated. This follows strong investor interest in the previous day’s record $68 billion auction of 2-year notes, which yielded 4.898%, slightly below pre-auction yields, easing concerns of the yield topping 5.0%. The upcoming auction of 7-year notes on Thursday will be closely watched as a gauge of investor appetite for longer-term Treasurys given the uncertain outlook on interest rates.
  • Investor appetite for Treasurys could face headwinds on Friday following the release of the personal consumption expenditure (PCE) price index. This inflation gauge is being closely watched by the Federal Reserve as it guides its interest rate decisions this year. Consensus forecasts predict a deceleration in the core index, from a year-over-year increase of 2.78% in February to 2.66% in the following month. A reading at or below expectations is unlikely to have a strong impact on rate cut expectations, which now show a terminal Fed Funds rate at a target range of 4.50% to 4.75%; however, a higher reading could boost expectations of no rate cuts at all this year.

  • Fixed-income securities, particularly those with longer maturities, face heightened volatility for the remainder of the year. Investor uncertainty surrounding factors like policy rate changes, geopolitical conflicts, and widening budget deficits is driving this increased volatility. Intermediate-term bonds offer a potential hedge, balancing interest rate risk and price risk more effectively than bonds on either extreme of the yield curve. However, a hawkish shift in Fed policy expectations could lead to broad-based rate hikes across all maturities. Rising rates could dampen the momentum of already expensive equities, potentially benefiting previously overlooked stocks, especially if corporate earnings disappoint investors.

Swing Producer? US oil production has helped moderate oil prices in the face of geopolitical turmoil, but concerns linger about its long-term ability to continue doing so.

EU-China Rivalry: EU regulators are tightening scrutiny of Chinese firms, potentially aligning with the US approach of strategic competition with China.

  • The escalating tensions between the EU and China highlight Western efforts to counter China’s excessive production capacity, aiming to safeguard their domestic manufacturing industries. This trend is likely to persist in the near future, with both upcoming EU parliamentary elections and the US presidential contest potentially favoring candidates who advocate for a firm stance on China. The new protectionist stance will likely complicate efforts of Beijing to bolster its economy and will make deflationary pressure within the country worse. Furthermore, it could potentially complicate efforts to stabilize the yuan (CNY), which has weakened significantly against the dollar.

In Other News: White-collar job growth has stalled in the US recently, with companies focusing on streamlining operations. French President Emmanuel Macron has called for a monetary policy overhaul to allow countries more flexibility to spend on defense. The Scottish government collapsed after a power-sharing agreement crumbled due to ideological differences.

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