U.S. stocks ended Monday with modest gains after fluctuating for the final stretch of the trading session as investors attempted to come to terms with Federal Reserve policy that could remain restrictive for longer than previously expected.

The S&P 500 and the Nasdaq 100 bounced back after a dismal week for Wall Street. The 10-year Treasury yield declined to hover around 3.92 per cent. A dollar index retreated. Gold and copper rose. 

Investors have been recalibrating their forecasts for where rates will end up, especially since inflation hasn’t been moderating as the Fed expected. Traders are pricing U.S. rates to peak at 5.4 per cent this year, compared with about 5 per cent just a month ago. Investors remained on the edge after Fed Governor Philip Jefferson firmly stood by the central bank’s 2 per cent inflation goal on Monday.

The fresh U.S. data that investors are contending with on Monday point to an economy that remains robust despite the Fed’s persistent rate hikes. U.S. pending home sales rose last month by the most since June 2020, which could keep pressure on the Fed to stay hawkish. 

Meanwhile, orders for durable goods fell, in their steepest decline since April 2020, underscoring a pullback in bookings for commercial aircraft. But excluding transportation equipment, durable goods orders rose more than expected. Orders placed with U.S. factories for business equipment also rose in January as companies continued to make longer-term capital investments despite uncertainty about where the economy is headed. 

“We have had a bit of a repricing in markets in February where there is more concern that central banks will have more work to do,” Sam Lynton-Brown, global head of macro strategy at BNP Paribas, said on Bloomberg Television. “The view we have is that there’s still some further room to run on that repricing. So either equities are at risk to come lower or rates are at risk to head higher.”

In the near-term, both scenarios could play out if the markets price in a more hawkish policy outlook for the Fed, he said. 

The risk-reward for equities remains poor, JPMorgan strategists led by Marko Kolanovic wrote in a note.

“The risk-reward of holding bonds at this level of short-term yields looks better than equity (earnings yield) than any time since the great financial crisis,” they wrote.

For now, a more optimistic outlook for earnings estimates is helping ease fears that inflation will remain entrenched even as growth slows, drawing investors back to stocks. Those treading into this market risk are falling into a “bull trap” according to Michael Wilson, chief U.S. equity strategist at Morgan Stanley. That view was echoed by Torsten Slok, chief economist at Apollo Global Management.

“A generation of investors has since 2008 been taught that they should buy on dips, but today is different because of high inflation, and credit markets and equity markets are underestimating the Fed’s commitment to getting inflation down to 2 per cent,” Slok wrote in a note.

Key events this week:

• U.S. wholesale inventories, Conf. Board consumer confidence, Tuesday
• China manufacturing PMI, non-manufacturing PMI, Caixin manufacturing PMI, Wednesday
• Eurozone S&P Global Eurozone Manufacturing PMI, Wednesday
• U.S. construction spending, ISM Manufacturing, light vehicle sales, Wednesday
• Eurozone CPI, unemployment, Thursday
• U.S. initial jobless claims, Thursday
• Eurozone S&P Global Eurozone Services PMI, PPI, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.3 per cent as of 4:01 p.m. New York time
• The Nasdaq 100 rose 0.7 per cent
• The Dow Jones Industrial Average rose 0.2 per cent
• The MSCI World index fell 1.2 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.3 per cent
• The euro rose 0.6 per cent to US$1.0608
• The British pound rose 0.9 per cent to US$1.2057
• The Japanese yen rose 0.2 per cent to 136.25 per dollar

Cryptocurrencies

• Bitcoin fell 1 per cent to US$23,335.77
• Ether fell 1.1 per cent to US$1,624.06

Bonds

• The yield on 10-year Treasuries declined two basis points to 3.93 per cent
• Germany’s 10-year yield advanced four basis points to 2.58 per cent
• Britain’s 10-year yield advanced 15 basis points to 3.80 per cent

Commodities

• West Texas Intermediate crude fell 0.9 per cent to US$75.67 a barrel
• Gold futures rose 0.4 per cent to US$1,824 an ounce
• This story was produced with the assistance of Bloomberg Automation.
• The risk-reward for equities remains poor, JPMorgan strategists led by Marko Kolanovic wrote in a note.
• “The risk-reward of holding bonds at this level of short-term yields looks better than equity (earnings yield) than any time since the great financial crisis,” they wrote.