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Market will be careful, FED weighs in on inflation

Interest rate increases are not off the table depending on data

Market jitters on May Day: Bond volatility, Fed doubts. Yields rise, stocks fluctuate. Global currencies falter, Bitcoin plummets.

May Day Uncertainty Hits the Wall Street Market

The U.S. bond exchange faces significant volatility as concerns over inflation and Federal Reserve policy direction persist. Markets, once expecting multiple interest rate cuts, now price in merely a quarter-point cut by year-end, with only 27 basis points (bps) expected for 2024. U.S. employment cost growth accelerated in Q1, adding to inflationary pressures. The anticipation of $1.1 trillion in new Treasury debt sales over the next two quarters exacerbates bond market jitters. Two-year Treasury yields surpassed 5%, a mere 32 bps below the current Fed policy rate, while 10-year yields rose above 4.7%. Exchange-traded funds capturing longer-term Treasury bonds (TLT.O) registered losses exceeding 10% for the year.

Currency Fluctuations and Bitcoin’s Decline

The dollar index (DXY) nears six-month highs amidst dollar strength. Despite Japan’s intervention to support the yen, it remains weak, while the Swiss franc leads the decline in Europe. Bitcoin plummeted to its lowest in over two months, reflecting market volatility across asset classes.

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Mixed Results Fuel Market Volatility

Corporate earnings reports drive stock funds sentiment. Amazon’s post-earnings surge contrasts with disappointments from Super Micro Computers and AMD, which experienced share declines of 14% and 7% respectively. CVS Health and Starbucks reported significant stock declines of 12.1% and over 12% respectively after missing earnings targets.

European Closures and Asian Struggles

European markets were closed for the May Day holiday, contributing to subdued trading. In Asia, Tokyo’s Nikkei 225 declined amidst concerns over manufacturing contraction, while Australia’s S&P/ASX 200 dipped due to limited market participation.

Oil and Forex Fluctuations

Crude oil prices retreated amidst hopes for a Gaza ceasefire, with both WTI and Brent crude experiencing losses. Currency markets saw minor fluctuations, with the euro and pound remaining relatively stable against the dollar. The yen continued its downward trajectory.

Inflationary Concerns and Rate Expectations for the Market

With inflation surpassing expectations, the Federal Reserve is expected to maintain its current interest rate stance. Chair Jerome Powell’s remarks will be closely watched for insights into future monetary policy decisions. The Fed’s preferred gauge of inflation reached a 4.4% annual rate in Q1, well above the 2% target, while the economy remains healthy and the labor market thrives. Expectations for rate cuts have diminished, with traders now expecting at most two cuts this year, compared to initial forecasts of six cuts.

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