Stocks drop, bonds rise as Fed rate bets ease

investmentnews.com:

Stocks retreated and bond yields climbed on speculation the Federal Reserve will be in no rush to cut interest rates as the economy shows signs of resilience.

At a time when good economic news is not really that great from a policy perspective, a solid reading on retail sales fueled concern about Wall Street’s bold dovish bid. And with central bank officials recently striking a more cautious tone about prospects for easing, it ended up being the perfect recipe for traders to push back the timing for the first Fed move — assigning lower odds of a rate reduction in the first quarter.

“We will need to see data that is consistent with a still healthy and resilient consumer, but not to the point where the Fed would be inclined to delay rate cuts or cut less in 2024,” said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter.

Strong consumer spending helped propel the economy in recent weeks, the Fed said in its Beige Book survey. Bond traders abandoned wagers the Fed will cut rates in March, pushing swaps to levels consistent with only about 50% odds of a quarter-point reduction during the first quarter.

Treasury two-year yields topped 4.3%. The move also reflected a slide in UK bonds after data showed inflation picked up — making traders pare their bets on Bank of England easing. The dollar rose. The S&P 500 extended this year’s losses. Wall Street’s “fear gauge” — the VIX — hit the highest since November.

US retail sales rose at the strongest pace in three months in December, capping a solid holiday season that suggests consumer resilience heading into the new year. Separate data showed homebuilder sentiment climbed January by the most in nearly a year as lower mortgage rates boosted customer