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Shares rose to their best day in more than a month on Friday. The Dow rose 700 points and the S&P 500 and Nasdaq rose 2.3% and 2.6%, respectively, as traders bet a slowing in wage growth could mean inflation is finally cooling.
But the big turnaround story in the short first week of the year isn’t just about stocks, it’s also about bonds.
What’s up: US Treasuries posted their worst year on record in 2022, but investors are suddenly reversing. You seem to be quite bullish on the bond market now.
Last year’s bond massacre came as the Fed hiked short-term interest rates at the fastest pace in about four decades, taking the Fed’s interest rate to its highest level in over a decade. Bonds are particularly sensitive to these hikes – when interest rates are raised, existing bonds fall in price as investors favor the new debt that will soon be issued with those higher interest payments.
But now investors are betting that those rate hikes are mostly over and inflationary pressures are easing.
Treasuries just had their strongest start to the year since 2001, when investors eagerly bought government bonds on the (correct) assumption that then-Fed Chairman Alan Greenspan was about to cut rates. This time, investors are reaching for bonds as they expect the pace of Fed rate hikes to ease soon.
This is great news for Treasuries. Core or investment-grade US bonds typically do well when the Fed pauses rate hikes. According to data from LPL Financial, since 1984, core bonds have averaged 6-month and 1-year returns of 8% and 13%, respectively, after the Fed stopped raising interest rates.
That anticipation was evident at the end of last week. Treasuries fell after releasing strong private payrolls data earlier in the week but quickly rebounded after US jobs data showed wage growth was moderating.
The gains are consistent with economists’ bullish outlook for falling yields and rising bond prices in 2023.
The other side: The problem is that there is no guarantee that interest rates will actually fall, and investors could be caught out if they don’t.
“The potential for interest rates to rise and stay longer would hit bond markets hard, especially given that weaker economies would likely force governments to borrow more,” said Chris Varrone, managing director at Strategas, a Baird Company.
Former Treasury Secretary Larry Summers on Friday warned bond investors who believe inflation is slowing and a new era of low interest rates is on the way.
“I suspect tumult” on bonds 2023 Summers said on Bloomberg Television. “This will be remembered as a ‘V’ year as we realized we were heading into a different type of financial era, with different types of interest rate patterns.”
Persistently high inflation is likely to have put a damper on Christmas shopping.
Macy’s Chairman and CEO Jeff Gennette said on Friday that the lull in the non-peak weeks of the fourth quarter was “deeper than expected” and that consumers will continue to feel pressured into 2023, my colleague Ramishah Maruf reports .
Macy’s said Friday that its holiday quarter net sales are likely to be in the low-to-mid range of its previously released guidance range of $8.16 billion to $8.4 billion. It reported revenue of $8.67 billion for the fourth quarter of 2021.
Americans spent more this season to keep up with high prices. According to Mastercard Spending Pulse, U.S. retail sales increased 7.6% in the period from November 1 to December 24 compared to the same time last year. US retail sales came in lower-than-expected in November, falling 0.6% over the month, the weakest performance in almost a year.
Gennette warned that consumer sentiment is unlikely to change with the new year.
“Based on current macroeconomic indicators and our proprietary credit card data, we believe the consumer will continue to be under pressure in 2023, particularly in the first half, and have planned inventory mix and depth of initial purchases accordingly,” Macy’s CEO said.
The Company expects to report full fourth quarter and full year 2022 results in early March 2023.
According to a senior central bank official, China’s crackdown on tech giants is coming to an end and the country’s economic growth is expected to get back on track soon. my colleague Laura He reports.
The crackdown on fintech operations by more than a dozen internet companies is “essentially” over, Guo Shuqing, Communist Party chief at the People’s Bank of China, said in an interview with the state-run Xinhua News Agency on Saturday.
“Next, we will promote the healthy development of Internet platforms,” said Guo, who is also chairman of China’s Banking and Insurance Regulatory Commission. “We will encourage them to show their strength to drive economic growth, create more jobs and compete globally.”
His comments came on the same day that Chinese billionaire Jack Ma relinquished control of Ant Group after the fintech giant’s shareholders agreed to a restructuring of the company.
Chinese tech stocks listed on US exchanges have already had a dream start to 2023.
The Nasdaq Golden Dragon China Index — a popular index that tracks Chinese companies listed in the United States — was up 13% in the first two trading days of 2023.
The extensive regulatory action since the end of 2020 had driven investors away. In 2021 and 2022, the Nasdaq Golden Dragon China Index plummeted 46% and 25%, respectively.
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