‘Higher for longer’ rates remain a threat to U.S. stocks after inflation data
By David Randall
NEW YORK (Reuters) — The latest U.S. inflation data is unlikely to ease worries over persistently high Treasury yields that have gnawed on stocks over the last few weeks, investors said, although many believe the longer-term trend of cooling consumer prices remains intact.
U.S. consumer prices climbed by 0.6% in August, broadly in-line with economists expectations. In the 12-months through August, the CPI jumped 3.7%, though year-on-year consumer prices have come down from a peak of 9.1% in June 2022.
While that data does not necessarily argue for more rate increases, it did little to dispel expectations that the Federal Reserve will leave interest rates at current levels for longer than previously expected, a view that has boosted Treasury yields while dulling the allure of stocks since the equity market peaked in July.
With the S&P 500 already up over 16% year-to-date and stocks richly valued by some metrics, some investors believe equities from will struggle to make headway for the rest of 2023.
«As long as inflation continues to be sticky we believe that the market will face more volatility and trade sideways,» said Alex McGrath, chief investment officer for NorthEnd Private Wealth, adding that falling valuations for risk assets may be «the next shoe to drop» for the U.S. stock market.
Futures tied to the Fed's funds rate now show a 45% chance of at least one rate hike by December, up from a roughly 31% chance seen a month ago. Markets now anticipate that the Fed will cut rates for the first time in July 2024, compared with expectations a month ago that rates would begin falling by March.
The central bank concludes its monetary policy meeting on Sept. 20 and is expected to leave rates unchanged,
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