Wall Street pared its bets on Federal Reserve rate cuts on speculation the dovish bid emboldening stock and bond bulls has gone too far.

Equities fell, while Treasury yields climbed with the dollar as Fed Governor Christopher Waller appeared to push back against expectations for as many as six rate cuts this year. While Waller wasn’t outright hawkish, his remarks weren’t massively dovish either — prompting a recalibration of rate wagers. Fed swaps show the probability of easing as soon as March dropping to about 65 per cent from almost 80 per cent Friday.

Waller said the Fed should take a cautious approach when it begins cutting rates, adding he sees no reason to move as quickly as in the past — pointing to previous economic shocks that have precipitated rapid rate cuts. To Kathy Jones at Charles Schwab, when you get either a data point or a comment like Waller’s, that seems to imply: ‘Well, maybe not so fast’.”

“We view his comments emphasizing no need to rush as indicating that he does not expect to push for a March cut — and read his arguments in general as more consistent with our baseline of a first cut in May or June,” said Krishna Guha, vice chairman at Evercore ISI.

U.S. 10-year yields topped 4 per cent, the greenback rose the most since March and the S&P 500 lost steam. Morgan Stanley slid amid a warning on lower margins in wealth, while Goldman Sachs Group Inc. rose as profit beat estimates. Boeing Co. sank on an analyst downgrade. Apple Inc. slipped as the U.S. Supreme Court refused to consider its appeal in an antitrust suit challenging the App Store.

Ipek Ozkardeskaya, a senior analyst at Swissquote, says the first quarter of this year will be marked by the realization that it’s too early for the central banks to cut rates.

“With today’s info in hand, the Fed is intent on cutting three times this year — and would only cut more if the economic situation deteriorated and the unemployment rate started heading towards 4.5-5 per cent, I believe,” said Peter Boockvar, author of the Boock Report. That would be up from 3.7 per cent in December.

To Art Hogan at B Riley Wealth, it’s more important to focus on the why the Fed is cutting rates instead of the when.

“If the wheels are coming off the economic cart and the Fed feels the need to rush in to stimulate, that would be sub-optimal,” Hogan noted. “The good rate cuts would come as the path of inflation continues toward the Fed’s target, and they find themselves to be overly restrictive.”

Bond bulls have overtaken bears in the latest MLIV Pulse survey amid bets on Fed cuts this year. 

Those expecting 10-year yields to drop over the next month represented 57 per cent of respondents, an increase from 51 per cent in November, and the highest percentage since MLIV Pulse started asking the question in August 2022.

Optimism over lower rates has spurred investors to up their exposure to U.S. stocks to the highest in over two years, according to a Bank of America Corp. fund-manager survey. 

There is “record optimism on rate cuts” and 79 per cent of survey respondents expect the global economy to experience either a soft or no landing in 2024, BofA’s team led by Michael Hartnett wrote in a note.

UBS Group AG is the latest bank to lift its outlook for U.S. equities, ratcheting up its 2024 forecast for the S&P 500 Index by 6 per cent on Tuesday, to 5,150, following the Fed’s dovish policy shift in December. The move comes roughly a month after the Swiss lender set its year-ahead call for the U.S. equity benchmark at 4,850. RBC Capital Markets boosted its outlook last week, while Goldman Sachs did so in December, a month after setting it.

Meantime, earnings estimates have been slashed so much over the past three months that Wall Street strategists now expect most companies will easily beat analyst forecasts this season. 

There’s however little reason to cheer, as Morgan Stanley strategists noted that a 7 per cent cut to fourth-quarter profit estimates means U.S. companies are poised to report almost no growth compared to the year before. That’s “creating a lowered bar and a higher probability” of yet another mid-single-digit earnings-per-share beat rate, Michael Wilson said. 

“While markets may experience modest downside volatility through the results season after the strong rally in November and December, we think upside remains in U.S. equities amid looser monetary policy and durable corporate profits,” said Solita Marcelli at UBS Global Wealth Management. “Any selloff should be fairly mild, in our view, and could represent an opportunity to increase exposure to stocks.”

Corporate Highlights:

• Donald Trump’s victory at the Iowa caucuses lifted Digital World Acquisition Corp., the blank-check firm working on taking his media company public.
• A federal judge blocked JetBlue Airways Corp.’s US$3.8 billion acquisition of Spirit Airlines Inc., saying the combination would stifle competition and raise fares for consumers.
• Microsoft Corp. Cd
• hief Executive Officer Satya Nadella said while he wants consistency and good governance at partner OpenAI, he’s not worried about the company’s nonprofit structure and doesn’t want greater control over his partner.
• Dish Network Corp. parent EchoStar Corp. proposed swapping more than $5 billion of debt due in the coming years for new notes, the second such offer in less than a week as the company looks to address looming maturities.
• PNC Financial Services Group Inc. reported profits that missed analyst estimates, as it continued to grapple with declining deposits and tepid loan growth.
• Deutsche Bank AG is preparing staff for a tough bonus season. Variable pay “will reflect performance in 2023,” Chief Financial Officer James von Moltke said.
• First Quantum Minerals Ltd. will cut spending, pause its dividend and put smaller mines up for sale in a sweeping effort to free up cash after it was ordered to shutter its $10 billion copper operation in Panama.

Key events this week:

• China GDP, property prices, retail sales and industrial production, Wednesday
• Eurozone CPI, Wednesday
• U.S. retail sales, industrial production, business inventories, Wednesday
• Fed issues Beige Book survey of regional economic conditions, Wednesday
• New York Fed President John Williams speaks, Wednesday
• ECB President Christine Lagarde and ECB Governing Council members Klaas Knot and Boris Vujcic speak at Davos, Wednesday
• U.S. housing starts, initial jobless claims, Thursday
• Republican presidential primary debate in New Hampshire, Thursday
• ECB President Christine Lagarde participates in Davos panel discussion, Thursday
• ECB publishes account of December policy meeting, Thursday
• Atlanta Fed President Raphael Bostic speaks, Thursday
• Canada retail sales, Friday
• Japan CPI, tertiary index, Friday
• U.S. existing home sales, University of Michigan consumer sentiment, Friday
• ECB President Christine Lagarde and IMF Managing Director Kristalina Georgieva speak in Davos, Friday
• San Francisco Fed President Mary Daly speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.4 per cent as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average fell 0.6 per cent
• The MSCI World index fell 0.7 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.8 per cent
• The euro fell 0.7 per cent to $1.0872
• The British pound fell 0.7 per cent to $1.2632
• The Japanese yen fell 1 per cent to 147.25 per dollar

Cryptocurrencies

• Bitcoin rose 1.4 per cent to $43,280.61
• Ether rose 2.7 per cent to $2,587.85

Bonds

• The yield on 10-year Treasuries advanced 12 basis points to 4.06 per cent
• Germany’s 10-year yield advanced three basis points to 2.26 per cent
• Britain’s 10-year yield was little changed at 3.80 per cent

Commodities

• West Texas Intermediate crude fell 1.1 per cent to $71.88 a barrel
• Spot gold fell 1.4 per cent to $2,028.26 an ounce