S&P 500 Rally Hits a Wall as Treasury Yields Spike: Markets Wrap

(Bloomberg) — A rally that drove stocks to a series of all-time highs ran out of steam, with Treasury yields soaring and the dollar hitting a two-year high ahead of key inflation data.

Equities edged lower after the S&P 500’s biggest five-day run in a year. Following sizable post-election gains, small caps and banks lost ground. Tesla Inc. dropped after an almost 45% surge. Bitcoin whipsawed. The dollar hit its highest since November 2022.. Treasury yields climbed, with data expected to show the uneven path of easing price pressures in the home stretch toward the Federal Reserve’s target.

Fed Bank of Minneapolis President Neel Kashkari said he’ll be looking at incoming inflation data to determine whether another rate cut is appropriate in December. To Will Compernolle at FHN Financial, a hot consumer price index and/or strong retail spending could push yields higher if a December rate cut “starts looking imprudent.”

The post-election advance in US stocks could stall as investors start to take profits, according to strategists at Citigroup Inc. led by Chris Montagu. Investor exposure to American shares jumped to the highest since 2013 after the presidential vote amid optimism around stronger economic growth, according to a survey from Bank of America Corp.

“We are on watch for potential profit taking, consolidation, or even correction for US equities heading into the first quarter of the new year,” said Dan Wantrobski at Janney Montgomery Scott. “Upward momentum remains strong and investor sentiment favorable, but stocks are once again overbought/extended across multiple timeframes.”

The S&P 500 fell 0.3%. The Nasdaq 100 dropped 0.2%. The Dow Jones Industrial Average slid 0.9%. The Russell 2000 slipped 1.8%.

Treasury 10-year yields advanced 12 basis points to 4.43%. The Bloomberg Dollar Spot Index rose 0.4%.

The core consumer price index due on Wednesday, which excludes food and energy, likely rose at the same pace on both a monthly and annual basis compared to September’s readings. The overall CPI probably increased 0.2% for a fourth month, while the year-over-year measure is projected to have accelerated for the first time since March.

A survey conducted by 22V Research shows 55% of investors expect the market reaction to CPI to be “mixed/negligible”, 31% said “risk-off” and only 14%, “risk-on.”

Meantime, 48% of investors surveyed by 22V believe that core CPI is on a Fed-friendly glide path without a significant tightening of financial conditions or a recession. However, 44% believe that financial conditions need to tighten. This is the highest value since April.

Scott Kleinman at Apollo Global Management Inc. has warned markets not to get too comfortable with the current trajectory of inflation and interest rates.

“Inflation is not tamed,” Kleinman said in a Bloomberg Television interview on Tuesday. “The Fed can say what it wants. You just have to open your eyes and look around.” 

Swap contracts are pricing in about 14 basis points of easing, or about 55% of a quarter-point rate cut on Dec. 18, down from near full certainty at the start of the month.

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