‘Fed-is-going-to-stop-soon’ trade peters out in stocks, bonds amid prospect of at least one more rate hike

A combination of hawkish remarks by a pair of Federal Reserve officials, solid bank earnings reports, and a rebounding consumer-sentiment reading on Friday are among the factors contributing to another abrupt readjustment in the financial market’s thinking about the path of interest rates.

The sudden readjustment dented the popular view that the Federal Reserve might be approaching the end of its yearlong rate-hike cycle. All three major U.S. stock indexes
DJIA,
-0.09%

SPX,
-0.21%

COMP,
-0.35%
were lower in the final hour of trading, while Treasury yields jumped — led by a 30–basis-point rise in the 1-month T-bill rate
TMUBMUSD01M,
4.066%
— in tandem with the ICE U.S. Dollar Index
DXY,
+0.54%.
Meanwhile, fed funds futures traders boosted the chances of Fed rate hikes in May and June, while paring their expectations for rate cuts later this year.

“Everything the market believed as of the close yesterday was contradicted today,” said Steve Englander, the New York-based head of global G10 FX research and North America macro strategy for Standard Chartered. As he put it, “everything went wrong in the ‘Fed-is-going-to-stop-soon’ trade,” though any future spillover from the banking-related stress has the potential to curtail policy makers’ rate-hike cycle.

Friday’s data included a report from the University of Michigan, which showed consumer sentiment creeping up and Americans more worried about high inflation. And although retail sales tumbled by more than expected in March, some people saw the potential for even deeper weakness, which didn’t come to fruition, Englander said. On top of this, JPMorgan Chase
JPM,
+7.52%
and Citigroup Inc.
C,
+4.80%
reported first-quarter results that pleased investors.

See: JPMorgan Chase stock moves positive for the year after it blasts past earnings and revenue estimates

Meanwhile, two Fed policy makers stepped into the fold with hawkish comments. Fed Gov. Christopher Waller said he sees the need for the central bank to keep raising rates, while Atlanta Fed President Raphael Bostic told Reuters that recent inflation data “are consistent with us moving one more time.”

As a result, fed funds futures traders put a roughly 77% chance on another quarter-of-a-percentage-point rate hike in May, which would lift the Fed’s main interest-rate target to between 5% and 5.2%, and they boosted the likelihood of a similar-size move in June to 18% versus 4.7% a day ago, according to the CME FedWatch Tool.

“The million-dollar question is, ‘how much more does the Fed have to do?’”  said Rob Daly, director of fixed income at Glenmede Investment Management in Philadelphia. “I’m in the camp that believes it might be one or two more hikes, but the next question is, ‘how long do they keep rates elevated?’”

“Risk assets have remained incredibly resilient, we’ve seen a very strong labor market, and inflation is still high,” Daly said via phone. “I don’t see any reason the Fed would be cutting rates anytime soon. The data has been resilient and not necessarily weak enough for the Fed to change course.”