The world’s largest bond market rose after the latest batch of economic reports reinforced speculation the Federal Reserve will be able to cut interest rates this year to prevent a bigger U.S. slowdown.

Traders gearing up for the Fed’s favoured inflation gauge piled into Treasuries as several data points illustrated a downshift in growth tied to the central bank’s higher-for-longer stance. The government marked down personal spending to an annualized 1.5 per cent in the first quarter. Separate releases showed declines in orders and shipments of certain business equipment, weakness in the job market and a slide in homebuying.

To Chris Low at FHN Financial, the slowdown story got stronger.

 “Continuing claims inched higher and are now the highest since late 2021 — sending a warning sign that the labor market could be softening,” said Jeff Roach at LPL Financial. “We expect both consumer and business activity to slow in the latter half of 2024, giving the Fed ample opportunity to begin cutting rates later this year.”

Treasury 10-year yields fell four basis points to 4.29 per cent. A US$44 billion sale of seven-year notes saw solid demand. Swap markets are pricing in about 45 basis points of easing in 2024, which would equate to less than two cuts. 

The S&P 500 fluctuated around 5,480. Nvidia Corp. dropped as Micron Technology Inc.’s forecast failed to meet lofty expectations. Walgreens Boots Alliance Inc. tumbled 22 per cent after slashing its guidance. Chewy Inc. and Petco Health and Wellness Co. whipsawed as Keith Gill — known as “Roaring Kitty” — posted a cartoon image of a dog on X.

Traders are pricing in roughly “one volatility point” of added premium Friday, the session after Joe Biden and Donald Trump’s debate, according to an analysis from Citigroup Inc. that compared current and expected volatility. That assumes the effect of options expiry at quarter-end, another potential catalyst that could swing stocks, will be similar to that for triple-witching last week.

Fed Bank of Atlanta President Raphael Bostic said he continues to expect one rate reduction this year amid signs inflation has resumed its decline. His projection echoes that of the Federal Open Market Committee. Earlier this month, Fed officials penciled in just one rate reduction for 2024, according to the median forecast.

“FOMC members have indicated they want to see more progress on inflation,” said Don Rissmiller at Strategas. “Fortunately, the U.S. economy still looks robust enough currently to take an extended rate pause.”

Economists expect data Friday to show that the Fed’s preferred gauge of underlying inflation slowed to an annualized rate 2.6 per cent last month from 2.8 per cent. While that’s the lowest reading since March 2021, it remains above the Fed’s goal for 2 per cent inflation.

“A consensus move would conform with the narrative that the early-2024 reflationary pressures are fading, and the cooling trend seen during the second half of 2023 has once again resumed in the second quarter,” said Ian Lyngen and Vail Hartman at BMO Capital Markets. “Perhaps more importantly, investors are anticipating a round of inflation data that offers incremental support for a September rate cut.”

A string of weaker-than-estimated data points has sent the U.S. version of Citigroup’s Economic Surprise Index to the lowest since August 2022. The gauge measures the difference between actual releases and analyst expectations.

Worries about the strength of the labor market and the subsequent effect on consumer spending — in addition to the market’s reliance on just a handful of stocks — have caused consternation and warnings that the bull market needs a rest, recalibration and maybe help from the Fed, according to Quincy Krosby at LPL Financial.

Should Friday’s PCE data disappoint, stagflation headlines will hit the tape, Krosby noted. But if estimates hold or surprise with cooler data, it should help the market ease into July.

“Still, an overbought market and relatively expensive market based on just a handful of mega names may need to recalibrate and allow other sectors to co-exist with them or even begin to lead the market,” she said. “Such adjustments can trigger pockets of volatility coupled with attractive pockets of opportunity.”

Ed Clissold at Ned Davis Research says persistent pessimism toward the economy and stocks has been a key driver of the bull market. And much of the pessimism has given way to optimism or neutral views.

“The sentiment shift puts more of the onus on fundamentals for the bull market to continue,” he said. “Our conclusion is that the stock market can no longer rely on the economy beating low expectations. Fundamentals will need to drive the bull market in the second half.”

For now, Clissold remains bullish on stocks — both on an absolute basis and relative to bonds and cash.

To Chris Senyek at Wolfe Research, volatility will likely continue to pick up, and this will generally benefit the “Magnificent Seven” megacaps and the overall momentum trade in the weeks ahead.

“More specifically, we expect these themes to continue to benefit from environment in which growth is slowing — but the Fed is expected to kick off a deep cutting cycle,” he noted. “Further, our sense is that the biggest companies driving these trends will once again put up very solid results during the second-quarter earnings season.”

A survey conducted by 22V Research showed that investors largely expect artificial-intelligence companies to beat second-quarter earnings estimates.

About 59 per cent of the investors surveyed think AI earnings will “beat” expectations and 36 per cent believe they will “meet”. Only 5 per cent think they will “miss” forecasts.

Despite thinking that these companies will beat, the investors surveyed are unsure about the stock reaction for AI companies, 22V said.

In a month when Nvidia Corp. briefly became the world’s largest company amid AI optimism, hedge funds were “aggressively” selling tech stocks, according to analysis from Goldman Sachs Group Inc.

This month’s net selling in the U.S. tech sector is on track to be the largest on record going back in data since 2017, according to Goldman’s prime brokerage data. The trimming of exposure by hedge funds is in sharp contrast to the record inflows seen into tech-related funds last week.

Corporate Highlights:

• Boeing Co.’s move to switch its bid for Spirit AeroSystems Holdings Inc. to a mostly stock deal is likely an effort to preserve cash and stave off ratings downgrades as the planemaker teeters on the edge of junk, according to credit analysts.
• Denim maker Levi Strauss & Co. reported quarterly sales that fell just short of estimates, underscoring Wall Street’s high expectations for the company.
• International Paper Co. plunged after Suzano SA said it would end its pursuit of the U.S. paper giant.
• Customers of major U.S. telecommunications companies including AT&T Inc., T Mobile U.S. Inc. and Verizon Communications Inc. are reporting issues connecting to their networks while outside of the country.
• Target Corp. is lowering the bar to stop shoplifters, taking a tougher approach to further curb store theft that has weighed on operations.
• L’Oreal SA expects slower growth for the overall beauty market this year, according to its CEO, as weakness in China weighs on sales after years of rapid gains.

Key events this week:

• Japan Tokyo CPI, unemployment, industrial production, Friday
• U.S. PCE inflation, spending and income, University of Michigan consumer sentiment, Friday
• Fed’s Thomas Barkin speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 rose 0.2 per cent
• The Dow Jones Industrial Average was little changed
• The MSCI World Index was unchanged

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.2 per cent to $1.0703
• The British pound rose 0.1 per cent to $1.2639
• The Japanese yen was unchanged at 160.81 per dollar

Cryptocurrencies

• Bitcoin rose 0.7 per cent to $61,385.55
• Ether rose 1.7 per cent to $3,446.92

Bonds

• The yield on 10-year Treasuries declined four basis points to 4.29 per cent
• Germany’s 10-year yield was little changed at 2.45 per cent
• Britain’s 10-year yield was little changed at 4.13 per cent

Commodities

• West Texas Intermediate crude rose 1.2 per cent to $81.89 a barrel
• Spot gold rose 1.2 per cent to $2,326.02 an ounce