Stocks struggled to gain much traction as bond yields rose, with traders betting the Federal Reserve will lean against the recent easing in financial conditions by saying it will keep its options open on policy.

After notching its best week of 2023 amid dovish Fed bets, oversold technical levels and positioning, the S&P 500 edged slightly higher on Monday. A reversal of the moves in bonds weighed on sentiment, with 10-year yields up eight basis points to 4.65 per cent. Treasuries slid amid a heavy slate of corporate debt sales and ahead of a series of auctions beginning Tuesday.

Wall Street also waded through the Senior Loan Officer Opinion Survey — known as SLOOS — which showed tighter standards and weaker demand persist at U.S. banks. A raft of Fed officials — including Chair Jerome Powell — is due to speak over the next few days. Swaps are pricing in more than 100 basis points of rate cuts by the end of 2024 from an expected peak rate of 5.37 per cent.

“There may be a reality check ahead on the Fed,” said David Donabedian, chief investment officer of CIBC Private Wealth U.S. “We expect the rest of the year to be volatile, going through ‘manic-depressive swings’ based on where interest rates are headed.”

 “The Fed is DONE, DONE, DONE,” wrote Andrew Brenner, head of international fixed-income at NatAlliance Securities. “June is a done deal for a cut, while the markets are building in four rate cuts for next year — expect the Fed to push back on that, if nothing else for optionality. Powell will try to claw back some of the easing of financial conditions.”

To Chris Larkin at E*Trade from Morgan Stanley, the question on whether the market momentum can be sustained comes down to upcoming economic numbers continuing to point in the same direction as last week’s jobs report, which showed the labor market slowed in October.

“If that cooling trend persists, bulls may embrace the idea that the Fed will grow less hawkish,” Larkin noted. “Regardless, the market has a tendency to pull back in the short term, at least temporarily, after exceptionally big moves like the one that unfolded last week.”

TESTING TECHNICALS

The S&P 500 currently sits at 4,365.98 — and chartists are monitoring the 4,355 level, which marks a 50 per cent retracement from the peak-to-trough decline from its July highs to October lows. If it holds above that, the 4,400 level, where the index hovered during its mid-October highs, is the next number to watch, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.

“To reverse this downtrend, the S&P 500 still needs to break above 4,400,” said Lerner, whose firm is overweight U.S. stocks.

The S&P 500’s best week in a year was just a bear-market rally, according to Morgan Stanley’s Michael Wilson. Citing a gloomy earnings outlook, weaker macro data and deteriorating analyst views, “we find it difficult to get more excited about a year-end rally,” he added.

Meantime, JPMorgan Chase & Co.’s Marko Kolanovic says equities will soon be unattractive to investors again as the prospect of sustained elevated interest rates and slowing growth come back in focus. Falling bond yields and dovish central bank meetings were “knee-jerk positive for equities,” but the growth-policy tradeoff will remain challenging into year-end, he noted.

“The question we need to ask ourselves is whether the October breakdown was a ‘bear trap’,” said JC O’Hara, chief market technician at ROTH MKM. “If so, we should expect a swift move higher. If not, we should look to lighten exposure at current levels.”

To Jean Boivin at the research arm at BlackRock Inc., any year-end rally in stocks could prove short-lived because equities don’t fully reflect the outlook for rates remaining higher for longer.

Yields on 10-year Treasuries have tumbled since their 5.02 per cent peak on Oct. 23 as traders for the US$26 trillion bond market swung back to pricing the end of rate hikes. The combination of more benign U.S. refunding needs, weaker-than-expected jobs data and signs of the Fed turning less hawkish may have spurred widespread covering of short positions.

Leveraged funds ramped up net short Treasury futures positions to the most in data going back to 2006, according to an aggregate of the Commodity Futures Trading Commission figures as of Oct. 31. The bets persisted even though the cash bonds had rallied the week before.  

Lori Calvasina at RBC Capital Markets, says the biggest issue on the minds of the equity investors her firm spoke with last week was whether 10-year Treasury yields have really peaked. 

“Our view over the last month or so has been that if the surge in yields stopped soon, U.S. equities could escape without incurring too much additional damage,” Calvasina added. “November has typically been a good month for the S&P 500 from a seasonal perspective. December is also typically a good month, but, like October, there have been some difficult ones in recent history.”

Elsewhere, oil gained after Saudi Arabia and Russia reaffirmed they will stick with oil supply curbs of more than 1 million barrels a day through the end of the year. Gold declined after briefly climbing above $2,000 an ounce on Friday.

Corporate highlights:

• Dish Network Corp. plunged to the lowest level in 25 years after posting third-quarter earnings that fell well below Wall Street’s expectations and reporting steep customer losses.
• Tesla Inc. will produce a new model that will cost €25,000 ($26,863) at its factory near Berlin, Reuters reported, as competition intensifies to produce more affordable electric vehicles for the European market.
• Tyson Foods Inc., the largest U.S. meat producer, is recalling almost 30,000 pounds (13 metric tons) of chicken nuggets aimed at children due to possible contamination with metal pieces.
• Berkshire Hathaway Inc.’s cash pile scaled a fresh record at $157.2 billion, bolstered both by elevated interest rates and a dearth of meaningful deals where billionaire investor Warren Buffett could put his money to work.
• Bumble Inc. Chief Executive Officer Whitney Wolfe Herd will step down from the company she founded nearly 10 years ago.
• Ryanair Holdings Plc will pay out a dividend of €400 million ($430 million) and plans to hand over about a quarter of annual profit to shareholders as Europe’s biggest discount airline benefits from growing traffic.

Key events this week:

• Australia rate decision, Tuesday
• China trade, forex reserves, Tuesday
• Eurozone PPI, Tuesday
• U.S. trade, Tuesday
• UBS earnings, Tuesday
• Kansas City Fed President Jeff Schmid and his Dallas counterpart Lorie Logan speak, Tuesday
• Eurozone retail sales, Wednesday
• Germany CPI, Wednesday
• BOE Governor Andrew Bailey speaks, Wednesday
• U.S. wholesale inventories, Wednesday
• New York Fed President John Williams speaks, Wednesday
• Bank of Japan issues October summary of opinions, Thursday
• BOE chief economist Huw Pill speaks on the economy, Thursday
• U.S. initial jobless claims, Thursday
• Fed Chair Jerome Powell participates in panel on monetary policy challenges at the IMF’s annual research conference in Washington, Thursday
• Atlanta Fed President Raphael Bostic and his Richmond counterpart Tom Barkin speak, Thursday
• UK industrial production, GDP, Friday
• ECB President Christine Lagarde participates in fireside chat, Friday
• U.S. University of Michigan consumer sentiment, Friday
• Dallas Fed President Lorie Logan and her Atlanta counterpart Raphael Bostic speak, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.4 per cent
• The Dow Jones Industrial Average rose 0.1 per cent
• The MSCI World index rose 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.1 per cent to $1.0720
• The British pound fell 0.3 per cent to $1.2344
• The Japanese yen fell 0.4 per cent to 150.00 per dollar

Cryptocurrencies

• Bitcoin rose 1 per cent to $35,035.41
• Ether rose 1.4 per cent to $1,895.19

Bonds

• The yield on 10-year Treasuries advanced eight basis points to 4.65 per cent
• Germany’s 10-year yield advanced nine basis points to 2.74 per cent
• Britain’s 10-year yield advanced nine basis points to 4.38 per cent

Commodities

• West Texas Intermediate crude rose 0.4 per cent to $80.86 a barrel
• Spot gold fell 0.7 per cent to $1,978.26 an ounce