Stocks Rebound Strongly from Their Worst Week This Year

Wall Street rallied Friday as Treasury yields eased a bit. The 10-year benchmark rate had topped 4% Thursday, for the first time since November, before moving back to 3.96% at the end of the week. The 2-year Treasury yield traded at 4.86% after reaching highs not seen in more than a decade. Government bond yields ticked down even as a return to growth of U.S. service activity in February (first time in eight months) suggested the economy remains resilient despite the Fed rate hikes. 

The Dow Jones Industrial Average rose 1.75%, or 574 points, turning back into positive territory for the year (+0.74%). The tech-heavy Nasdaq Composite gained 2.58% (+11.68% year-to-date), while the S&P 500 rose 1.90% (+5.37% YTD), snapping its three-week losing streak.

European markets followed suit with the MSCI up 2.37% (+12.53% YTD) and the FTSE 100 up 0.87% (+6.65% YTD). Yet inflation data in France and Spain came in higher than expected. The ECB has promised another 50-basis point rate hike at its upcoming meeting in mid-March.

In Asia, China's manufacturing activity expanded at a fast pace in February, amid the recent rollback of pandemic restrictions. The adjusted Purchasing Managers’ Index™ (PMI™) rose from 49.2 in January to 51.6 in February. The Shanghai Composite gained 1.87% over the week (+7.74% for the year) as the economic recovery is picking up steam. Japan’s Nikkei performed in line with its peers (up 1.73% for the week, up 7.02% YTD).

Growth sectors attract dip buyers 

Most defensive sectors were in the red this week. Utilities lost 0.69%, extending the slump seen since mid-January. It was the worst S&P sector over the last seven weeks. Consumer staples edged down 0.41% while health care edged up 0.51%. 

By contrast, the China PMI™ report gave a big boost to the industrial metal sector (best performer this week, up 4.02%) as well as industrial stocks (+3.25%). Communication services partially recovered (+3.27%) from the severe loss suffered last week, helped by META (+8.72%) and GOOG stocks (+5.23%). Energy fared well too (+2.94%) as natural gas prices jumped over 35% in the last two weeks. WTI futures gained 4.40% this week though Bank of America analysts cut their estimate for average U.S. crude prices this year and Russian oil continues to flow despite sanctions. Lastly, tech stocks also attracted investors (+2.93%). APPL stocks were up +2.94%.

Treasury yields rise for the sixth straight week

U.S. Treasury yields rose for the sixth week in a row. The 10-year benchmark rate hit its highest level since November, climbing to 4.09% on Thursday before moving back to 3.96% on Friday. The 2-year yield closed at 4.86% on Friday after reaching its highest level (4.94%) since 2007. The yield curve inversion widened again (90 basis points), signaling more recession worries. Investors are now forecasting the Federal Reserve to lift rates to a terminal rate as high as 5.44%. Yet Governor Christopher Waller said that “if payroll and inflation data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released.”

In the eurozone, the yield on the benchmark German 10-year bond jumped to a 12-year high of 2.72% (+18 basis points week-over-week) after European Central Bank President Christine Lagarde set the table for a 50-basis point rate hike in March. ECB Chief Economist Philip Lane added ECB officials will not end rate hikes until they are confident price growth is heading back towards its 2% medium-term target. Notwithstanding these hawkish messages, the ECB should assess the risk that prolonged tightening can hurt the EU economy more than necessary. Several investment banks have recently revised their forecasts for the ECB's terminal rate to 4% as inflationary pressures weigh. That said, to what extent would it make sense to push the terminal rate up to 4% if the Core HICP inflation forecast for 2024 stands at 2.8%? Bearing in mind that it will take months before it is clear how the ECB’s moves have affected the economy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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