Fundamental Analysis

Equities Take a Hit with Treasury Yields on the Rise

  • Investors were evaluating the potential timing and magnitude of Fed rate cuts in 2024.
  • The likelihood of a rate cut in March has decreased from 79% to 65.7%.
  • Investor morale in the eurozone improved for the third consecutive month in January.

On Tuesday, equities ended lower as there was a slight increase in Treasury yields. Moreover, investors were speculating on the timing and magnitude of Fed rate cuts in 2024 and anticipating inflation data later in the week.

The likelihood of a rate cut in March has decreased from 79% to 65.7%, according to CME’s FedWatch Tool. Consequently, US Treasury yields remain close to 4%, with the 10-year yield slightly up at 4.019%.

Investors are preparing for the release of the US consumer and producer price indices this week. Moreover, the US earnings season begins on Friday, with reports from banks like JPMorgan.

Fed easing bets (Source: Bloomberg)
Fed easing bets (Source: Bloomberg)

More and more market participants are reducing bets on a hike as early as March. On Monday, Atlanta Fed President Raphael Bostic preferred tight monetary policy. This stance contradicts market expectations of potential rate cuts as early as March.

Moreover, Bostic reiterated his earlier position that he expects rate cuts later in the year. He believes two quarter-point cuts will be by the end of 2024, with the first cut likely in the third quarter. However, he played down the possibility of rate cuts as soon as March.

Meanwhile, Fed Governor Michelle Bowman has shifted from a consistently hawkish stance, expressing a willingness to support future rate cuts as inflation subsides.

Elsewhere, European equities rebounded on Monday, particularly in technology and retail stocks, after a weak start to the year. Last week, the European benchmark recorded its first weekly decline in eight, following a strong rally in the second half of 2023.

German industrial orders in November were below expectations, while investor morale in the Eurozone improved for the third consecutive month in January. 

Meanwhile, equities in the UK closed lower on Tuesday, with miners dragging down blue chips. This performance was like the downbeat sentiment across European equity markets ahead of key economic reports.

On the data front, British retailers reported poor Christmas sales, fueling concerns about a potential mild economic recession. 

Mixed global economic data has reduced expectations for future policy rate cuts. Attention now turns to the US quarterly earnings season and the US inflation report scheduled for Thursday.