US stocks stabilize after Fed’s Bullard jolted markets last week by signalling a rate rise as early as 2022

  • US futures recovered some losses after Federal Reserve official James Bullard said rates could rise by 2022.
  • He said the Fed’s hawkish tilt is only natural given inflation is stronger than anticipated.
  • Bullard predicted inflation will run at 3% in 2021 and 2.5% in 2022, before trending back to the Fed’s target of 2%.
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US and European stocks recovered some losses on Monday after Federal Reserve official James Bullard indicated the central bank may need to raise rates in late 2022, as he said inflationary pressure is expected to pick up faster than previously anticipated.

Futures on the Dow Jones, S&P 500, and Nasdaq rose 0.2%, suggesting a slightly higher start to trading later in the day.

In an interview with CNBC on Friday, Bullard predicted inflation would run at 3% this year and 2.5% in 2022, before trending back to the Fed’s 2% target. He isn’t a voting member on the Federal Open Market Committee this year, but will get a vote next year.

Bullard’s comments initially sparked a run for the exit door for equity markets and commodities while the dollar powered higher, Jeffrey Halley, a senior market analyst at OANDA, said. The Nasdaq still held up relatively well, as investors cycled out of growth stocks on the S&P 500 and Dow Jones and into the perceived safety of big-tech, he said.

However, UBS expects inflation to fall from current levels and believes persistent inflation above 3% is unlikely.

“While we don’t think investors should be unduly concerned about inflation in the near term, we do recommend they take steps to protect their portfolios against potentially higher inflation over the long term,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said.Some assets perform better than others in a higher-inflation environment.”

Inflation, or the general rate at which prices climb, has become one of investors’ greatest concerns when considering the ability of the US economy to fully bounce back from the coronavirus-led crash.

Read More: Credit Suisse says to buy these 18 tech stocks now while they’re cheap and ahead of their years of powerful profit growth

The St. Louis Fed President said due to the pickup in inflation expectations, it’s only natural that the central bank would have adjusted its stance.

Bond prices reacted strongly to the Fed’s hawkish pivot last week, with 10-year yields initially increasing over 8 basis points on Wednesday. But by the end of the week, the yield curve flattened significantly, with longer-term yields falling sharply as investors grew confident that the Fed would rein in inflation, or that there may be a policy error in the offing, according to Deutsche Bank analysts.

Elsewhere in Europe, stocks recovered losses in early trading. Investors will be watching for the Bank of England’s key monetary policy decision on Thursday. Deutsche Bank economists expect the benchmark rate to remain at 0.1%, with no change to the size of the central bank’s asset-purchase program, currently £895 billion ($1.2 billion).

UK mid-cap grocer Morrison’s surged 30% after getting a takeover bid from a US private equity firm Clayton, Dubilier & Rice, although the offer was rejected. Shares in grocery-chains Sainsbury’s rose 4.5% and Tesco rose around 2%.

Overall, London’s FTSE 100 and the Euro Stoxx 50 fell 0.2%, while Frankfurt’s DAX was about flat.

Asian equities followed Wall Street’s initial sell-off after Bullard’s comments by trading lower than other regions.

Japan’s Nikkei fell 3.2%, Hong Kong’s Hang Seng fell 0.9%, while China’s Shanghai Composite was about flat.

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The Fed will be forced to buy more bonds as US stimulus drives up interest rates, Ray Dalio says

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The ‘king of hedge funds’ Ray Dalio had a nightmarish 2020

  • The Federal Reserve will be forced to increase its quantitative easing program by buying more bonds as interest rates continue to rise, according to Ray Dalio.
  • Dalio believes the recent $1.9 trillion fiscal stimulus bill will spur more treasury offerings by the US government, further damaging the “supply/demand problem for bonds,” Dalio said.
  • In its most recent Fed meeting, chairman Jerome Powell said its current monetary policy is appropriate.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The Federal Reserve is going to have to revamp its quantitative easing program and buy more bonds to help limit the rise in interest rates, according to hedge fund billionaire Ray Dalio and first reported by Bloomberg.

In a Saturday panel at the China Development Forum, Dalio said the recently passed $1.9 trillion COVID-19 stimulus bill will lead the US government to raise more money by issuing more treasury bonds, further worsening the “supply/demand problem for the bonds.”

That supply and demand problem for bonds will lead to a further rise in interest rates, which has already wreaked havoc on certain parts of the stock market like the high-growth technology sector as the 10-year Treasury yields climbed to a pre-pandemic high of 1.75% last week.

A continued rise in interest rates “will prompt the Federal Reserve to have to buy more [bonds], which will exhibit downward pressure on the dollar,” Dalio said. The Fed already buys about $120 billion in bonds per month.

In a dire scenario, Dalio explained that the world is “very overweighted in bonds” that have a negative yield, and that “not only might there be not enough demand, but it’s possible that we start to see the selling of those bonds,” according to Bloomberg.

According to Bank of America, there is currently $13.7 trillion in negative yielding debt. In the event that bonds are liquidated by investors, “that situation is bearish for the dollar,” according to Dalio.

Despite the concerns, Fed Chairman Jerome Powell said last week that its current monetary policy is appropriate, and pushed back against the idea that the recent jump in interest rates pose a problem to the economy.

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BlackRock’s bond chief Rick Rieder breaks down why he’s not worried rising yields will hurt the stock market

Rick Rieder

The recent rise in bond yields has left some investors worried about what it means for the stock market, but Rick Rieder told CNBC he’s not that worried. 

As the 10-year Treasury yield rose to its highest point in over a year Thursday, the CIO of global fixed income explained that the rise in yields should be taken into historical perspective.

“We started from negative 1%. The history of real rates, on average the last 25 years, the average has been about 1.5% positive and usually, when you get this sort of economic growth, you’re talking about real rates that go to 3%, 4%, 5% positive,” said Rieder. “We may get to zero percent real rates, so you still have an extremely accommodative environment.” 

Economic data suggests that the US will see an “explosive growth rate,” and markets are anticipating that yields will have to move higher.

While this happens he anticipates there will be a “little bit of uncertainty” in the stock market and volatility may rise, but then stocks will “recalibrate.”

“I’m not that worried about equities,” Rieder said. 

The bond chief added that there are some stocks with high-flying valuations that will likely pull back as yields move up. High-growth stocks like those in the technology sector are seen as particularly vulnerable to a move higher in yields. On Thursday the Nasdaq suffered over a 3.5% intraday decline. 

Rieder mentioned that his team has been looking into specific areas of technology included AI and the semiconductor space, but they’ve also been adding outside the sector.

“We’ve added to financials. We like the cyclicals, we like the consumer space quite a bit. The adds have been bigger there than in pure technology,” Rieder said.

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