Tag Archives: bond markets

Business

Stock Futures Fall as Bond Yields Hit Three-Month High

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U.S. government bond yields hit their highest level in three months and stock futures sagged as investors rotated out of interest-rate sensitive technology stocks.

Futures tied to the S&P 500 fell 0.9%, a day after weakness among technology stocks pulled the broad index lower and snapped a three day winning streak. Tech-heavy Nasdaq-100 futures fell 1.6% Tuesday, while Dow Jones Industrial Average Futures edged down 0.5%. 

Some investors are recalibrating portfolios to prepare for the gradual end of the ultra-supportive monetary policies employed to see the economy through the worst of the coronavirus-driven downturn. Rising yields make bonds more attractive than equities, especially highly-valued tech stocks for which investors count on profit growth far into the future.

“People are realizing, or at least remembering, that central banks are going to have to start raising rates,” said Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe. “The patient has become used to being given all these drugs, but soon those drugs are going to have to be reduced.”

Expectations of tighter monetary policy and concerns about inflation pressures pushed bond yields higher. The yield on the benchmark 10-year Treasury note rose for a sixth consecutive day Tuesday, to 1.524%, from 1.482% Monday. Bond yields and prices move in opposite directions.

Higher yields drew investors into the U.S. dollar. The

ICE

Dollar Index, which tracks the currency against a basket of others, edged up 0.3% to 93.64, its highest level since November.

Rallying energy prices are putting extra strain on economies and compounding concerns about inflationary pressures. Brent crude, the international oil benchmark, rose 0.9% to $79.44 a barrel, its highest level since October 2018.

Natural-gas prices set fresh highs Tuesday. U.S. Henry Hub natural gas prices jumped 6.3% to $6.09 per million British thermal units, their highest since 2014.

Fed Chairman

Jerome Powell

and Treasury Secretary

Janet Yellen

are set to appear before a Senate panel at 10 a.m. ET to discuss the state of the economic recovery. 

In premarket stock moves,

Ford Motor Company

rose 2.5% after the auto maker said it planned to strengthen its push toward electric vehicles by spending $7 billion on new factories.

Major tech names were lower ahead of the opening bell.

Twitter,

Qualcomm,

Nvidia,

Snap and Square all fell at least 2%. Shares of energy companies rose as oil prices climbed.

Occidental Petroleum Corporation

and

Devon Energy

each added more than 2%.

Overseas, European markets slumped, while Asian indexes were mixed. The pan-continental Stoxx Europe 600 fell 1.1%, led by losses among tech stocks. Chip giant ASML fell nearly 6%. Fintech payments company Adyen slipped over 5%. 

In Hong Kong, signs of support from China’s central bank helped boost beaten-down shares of Chinese real-estate developers. The People’s Bank of China said late Monday it would “maintain the healthy development of the property market and safeguard the legitimate rights and interests of house buyers.”

Shares of

Country Garden Holdings,

China Vanke

and China Overseas Land and Investment all jumped between 5% and 6%.

China Evergrande Group,

the ailing real estate giant that has fallen behind on a payment to international bondholders, rose more than 4%. The city’s flagship Hang Seng Index rose 1.2%.

Sunac China Holdings

surged almost 15%, snapping two days of steep declines, after the property company played down a leaked plea for help from a local government, and said sales were good.

In Japan, the Nikkei 225 edged down 0.2% while in mainland China, the Shanghai Composite Index rose 0.5%. 

Some investors are recalibrating portfolios to prepare for the gradual end of ultra-easy monetary policies.



Photo:

brendan mcdermid/Reuters

—Xie Yu and Frances Yoon contributed to this article.

Write to Will Horner at william.horner@wsj.com

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Surge in U.S. consumer prices slows in August, CPI shows. Has inflation peaked?

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The numbers: The cost of living rose in August at the slowest pace in seven months and signaled a big surge in inflation this year may have peaked, but Americans probably aren’t going to get much relief from higher prices anytime soon.

The consumer price index climbed 0.3% last month, the government said Tuesday. Economists polled by The Wall Street Journal had estimated a 0.4% increase.

The rate of inflation over the past year, meanwhile, slipped to 5.3% in August from 5.4%. It’s the first decline since last October.

Aside from a brief oil-driven spike in 2008, consumer prices have risen this year at the fastest pace in three decades. Consumers are paying more for food, gas, new and used cars and other goods and services.

Another closely watched measure of inflation that omits volatile food and energy rose an even smaller 0.1% in August. That’s the smallest increase since February.

This so-called core rate is closely followed by economists as a more accurate measure of underlying inflation.

The 12-month increase in the core rate fell for the second month in a row to 4% after hitting a 30-year high in June.

Big picture: The big wave in inflation this year is all but certain to crest soon, and perhaps it’s already started. The big debate on Wall Street and in Washington is how much price pressures recede and how long it takes.

The Federal Reserve is sticking to its prediction that the rate of inflation will fall toward its 2% target some time in the next year. Fed officials believe labor and material shortages spawned by the pandemic will fade and ease the upward pressure on prices.

Fed critics contend some inflation is getting ingrained in the economy. They worry inflation will remain well above 2% through next year and potentially pose a threat to the U.S. recovery.

For now Wall Street isn’t worrying all that much, but inflation could become a major issue in the 2022 U.S. elections if it doesn’t begin to subside a lot more. Republicans have used high inflation to attack the economic policies of President Joe Biden.

Americans themselves are pessimistic about inflation. A new survey by the New York Federal Reserve shows consumers expect inflation to average 5.2% in the next 12 months. These surveys haven’t always proven to be a good predictor of future inflation, however.

Key details: The cost of food — at groceries and restaurants — rose sharply again in August.

Prices also increased for gasoline, new autos, home furnishings and rent.

Prices fell for airfare, hotels, car insurance and used vehicles.

Fewer people bought airline tickets, perhaps because of kids returning to school and the spread of delta. The cost of flying sank 9.1% and was largely responsible for inflation in August coming in below Wall Street expectations.

The decline in used-car prices was the first in six months. Priced are still up 32% over the past year, but that’s down from a recent peak of 45%.

Both new and used cars are in short supply because of lingering disruptions from the pandemic.

What they are saying? “The hot inflation streak cooled considerably in August, especially with used car prices taking a big drop after inflating CPI for months,” said corporate economist Robert Frick of Navy Federal Credit Union.

“Monthly price increases may be cooling, but the annual rate of inflation remains red hot for now,” said economist Andrew Grantham of CIBC Economics.

 Market reaction: The Dow Jones Industrial Average
DJIA,
+0.76%
and S&P 500
SPX,
+0.23%
were set to open higher in Tuesday trades. The smaller-than-expected increase in inflation gave a boost to stocks. They had been trading lower in premarket action.

The yield on the 10-year U.S. Treasury note
TMUBMUSD10Y,
1.319%
rose slightly.

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Business

The cost of living posts biggest surge since 2008, U.S. CPI shows, as inflation spreads through economy

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The numbers: The cost of living leaped in June by the largest amount since 2008 as inflation spread more broadly through the U.S. economy, raising fresh questions about whether the spike in prices will subside as quickly as the Federal Reserve predicts.

The consumer price index climbed 0.9% last month, the government said Tuesday. The cost of used cars accounted for more than one-third of the increase, but prices for food, energy, clothing, plane tickets and hotels also rose sharply.

The increase easily exceeded forecasts. Economists polled by The Wall Street Journal had estimated a 0.5% advance.

The rate of inflation in the 12 months ended in June climbed to 5.4% from 5%. The last time prices rose that fast was in 2008, when oil hit a record $150 a barrel.

Another closely watched measure of inflation that omits volatile food and energy also rose 0.9% In June. The 12-month rate increased to 4.5% from 3.8% and stood at a 29-year high.

This core rate is closely followed by economists as a more accurate measure of underlying inflation.

Read: Higher U.S. inflation isn’t going away just yet. Here’s why

Big picture: The rapid recovery in the economy has had an unwanted side-affect: higher inflation.

Businesses can’t get enough supplies or labor to keep up with surging sales, forcing them to pay higher prices for almost everything. In turn, they are trying to pass those extra costs onto customers.

Read: Job openings hit record 9.2 million, but workers aren’t easy to find

The Federal Reserve has insisted for months that widespread shortages will fade away once the U.S. and global economies return to normal.

Ditto for inflation. The central bank has repeatedly referred to the sharp increase in prices as “transitory” and predicted inflation would taper off toward its 2% target by next year, using its preferred PCE price barometer.

Yet even the Fed admits it was caught off guard by how high inflation has risen. There’s a risk inflation could stay higher for longer than it expected, according to minutes of the Fed’s most recent strategy session.

Read: Fed admits inflation rose much higher than expected, but it still insists price increases are temporary

So far most investors have been unruffled, though the latest CPI is likely to stoke fresh worries.

Key details: The cost of used vehicles soared a record 10.5% in June following outsized gains of 7.3% in May and 10% in April. That category alone accounted for more than one-third of the increase in overall consumer prices last month.

These price increases won’t last long, however. Automakers are rushing to produce more new cars and trucks and eventually the market for used vehicles will revert to normal.

The cost of gasoline also rose 2.5% last month and was another big contributor to inflation. Gas prices are up 45% in the past year.

More worrisome was the largest increase in food prices since 2011, excluding the first few months of the pandemic. Higher food prices suggest some inflation is spreading more broadly through the economy.

Still, much of the increase in consumer prices last month was concentrated in goods and services whose prices fell sharply in the early stages of the coronavirus pandemic last year. Not just used vehicles, but airfares, hotels and restaurant menus.

These price increases are likely to subside soon, giving support to the Fed’s argument that the surge in inflation will prove temporary.

The cost of two other major consumer expenses, shelter and medical care, have also been rather tame. Rents have risen less than 2% in the past year and the cost of medical care has increased less than 1%.

What they are saying? “The spike in inflation still looks to be primarily Covid-related and temporary as outliers continue to drive much of the upward push in prices,” said Nationwide senior economist Ben Ayers. “But the effects of the recent jump could linger for consumers for some time with above-average costs extending into 2022.”

“Is the ‘transitory’ debate over?” asked senior economist Jennifer Lee of BMO Capital Markets. “The answer is no, the transitory debate is far from over. In fact, it got a little hotter.”

Market reaction: The Dow Jones Industrial Average
DJIA,
-0.20%
and S&P 500
SPX,
+0.03%
were fell slightly in Tuesday trades. The yield on the 10-year U.S. Treasury
TMUBMUSD10Y,
1.356%
note was little changed, however.

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Business

Tech Shares Fall as Bond Yields Rise

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U.S. stocks fell Thursday as shares of technology companies and other high-growth stocks succumbed to another selloff in the government bond market.

Investors appeared to rethink the implications of improving growth projections, pulling the stock market into the red a day after the S&P 500 closed at a fresh record and the Dow Jones Industrial Averaged finished above 33,000 for the first time.

They initially cheered comments from Federal Reserve Chairman

Jerome Powell

who reiterated the central bank’s commitment to supporting financial markets until the economy fully recovers.

But the Fed also increased its median projections for growth and inflation based on the latest round of stimulus doled out by Congress, leading investors to re-evaluate the broader implications that level of expansion will have on pockets of the market, analysts and money managers said. That sparked another round of selling of government bonds, pushing yields to their highest level in 14 months.

“This morning, the markets woke up and decided if the Fed is going to keep policy so loose, they want higher risk premium,” said Michael Matthews, a fixed-income fund manager at Invesco.

Stock futures had started heading lower overnight after the 10-year Treasury yield, a key benchmark for lending costs, breached 1.7% for the first time since January 2020.

The S&P 500 was recently down 0.5%, while the tech-heavy Nasdaq Composite slid 1.5%. The Dow Jones Industrial Average held up better, rising about 50 points to stay above 33,000.

Apple,

Amazon.com

and Google parent Alphabet all fell at least 1%. Electric car maker Tesla fell further, shedding more than 3%.

The higher yields mean borrowing costs for businesses and individuals will go up, so investors have been selling pricey tech stocks that look less valuable in a rising rate environment to load up on shares of companies poised to benefit from an economic rebound.

“It is all about inflation expectations: The fact that we are getting inflation expectations beyond the Fed’s target is spooking bond markets,” added Edward Park, chief investment officer at Brooks Macdonald.

Investors also contended with mixed economic data, suggesting that the economic recovery remains uneven.

The number of Americans applying for first-time unemployment benefits rose to 770,000 in the week ended March 13, from 725,000 in the week prior. While filings for jobless claims, a proxy for layoffs, has fallen from its peak last year, they remain at historically high levels.

Meanwhile, a manufacturing index from the Philadelphia Federal Reserve hit its highest level in more than three decades, suggesting activity continues to expand.

“The thing to watch is the employment numbers, and central banks are all watching that,” said Mr. Matthews. “The Fed and all central banks have decided it is better to run the economy hot, to aid the recovery, to get as low unemployment as they possibly can.”

On Thursday, investors looked to sectors like banks, airlines and energy companies, which could benefit more when social and business activity picks up. Shares of financial stocks in the S&P 500 rose 1.7%, as investors priced in the likelihood that banks could earn more on the loans they issue. Industrial companies also advanced, adding 0.8% in recent trading.

Tech stocks, meanwhile, slumped 1.7%, while the communication and consumer discretionary sectors fell around 1% each. Energy stocks, consumer staples, utilities and real-estate companies also fell.

Looking ahead, bond investors are betting that the Fed will raise interest rates within the next two years, despite data Wednesday that showed most policy makers still expect to maintain ultralow interest rates through 2023. Seven of 18 Fed officials anticipated lifting rates in 2022 or 2023, up from five in December.

Overseas, the pan-continental Stoxx Europe 600 ticked up 0.2%.

In Asia, most major benchmarks closed higher. China’s Shanghai Composite Index added 0.5%, while Hong Kong’s Hang Seng rallied 1.3%. Australia’s S&P/ASX 200 declined 0.7%.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Michael Wursthorn at Michael.Wursthorn@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Here’s how far the Nasdaq could fall if bond yields reach 2%

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In early Friday action, the yield on the 10-year Treasury was rising and Nasdaq 100 futures were falling.

That’s been the pattern over the last month. After a very close connection since the pandemic began, inflation-adjusted yields have kept climbing, but the Nasdaq 100 has suffered. That makes sense given the rich valuation tech stocks enjoy — when safe bonds offer more than crumbs as return, they present an investment alternative to stocks.

So analysts are now modelling just how far techs could fall if bond yields keep rising. Joe Kalish, chief global macro strategist at Ned Davis Research, says the Nasdaq 100 could fall 20% from its peak if the 10-year Treasury reaches 2%. (The index is already down 6% from its peak.)

Kalish’s calculation depends on other relationships holding steady. He says earnings yields and forecasted corporate bond yields have moved in tandem since 2014. A 2% 10-year Treasury would likely cause the bond yields on Baa-related bonds — the lowest investment-grade rating — to reach 4.5%, requiring a 20% drop in the Nasdaq 100 to keep that relationship consistent.

Strategists at French bank Societe Generale tend to agree. They’ve looked at the theoretical impact of a rise in bond yields, at different price-to-equity ratios. Given that the Nasdaq Composite is trading on 31.5 times earnings, according to FactSet data, the chart shows the impact could be steep.

That said, most notable is that Kalish remains bullish on stocks even with those risks. He looked at another measure of valuation, using Census Bureau data on cash-flow margins. “As cash flow has improved since the early 1990s and the cost of capital has fallen with interest rates, the economic margin has risen,” he writes. Right now, that margin is above its 5-year average. In the U.S., the firm is recommending small caps over large caps and value over growth.

The buzz

The $1,400 stimulus checks from the $1.9 trillion relief package signed into law by President Joe Biden could arrive as early as this weekend. Biden set a May 1 target for all adults to be eligible to receive vaccines.

Novavax
NVAX,
+8.77%
will be in the spotlight after the biotech said a completed late-stage clinical study showed that its vaccine candidate was 96.4% effective against “mild, moderate, and severe disease caused by the original COVID-19 strain.” Thailand delayed the rollout of the AstraZeneca
AZN,
-2.29%
vaccine, joining Scandinavian countries including Denmark, over blood clot concerns. Italy reportedly will impose a lockdown over the Easter weekend, according to wire service reports citing a draft decree.

China is planning ways to tame e-commerce giant Alibaba
BABA,
+2.77%,
according to The Wall Street Journal. China also fined 12 tech companies including Baidu
BIDU,
+6.76%
and Tencent
700,
-4.41%
for alleged antitrust violations.

Electronic signature company DocuSign
DOCU,
+5.90%
topped revenue and earnings expectations for its latest quarter and delivered a better-than-expected outlook on those metrics.

Producer price and consumer sentiment data highlight the economics calendar.

The markets

The yield on the 10-year Treasury
TMUBMUSD10Y,
1.594%
rose as high as 1.61% — surprising analysts given the successful auction of bonds of that maturity earlier in the week.

Stock futures
ES00,
-0.29%,
particularly on the Nasdaq 100
NQ00,
-1.30%,
slumped. Gold futures
GC00,
-1.12%
fell by around $20 per ounce.

Random reads

There’s a bull market in twins — with the birth rate up by a third since the 1980s.

Scientists want to send 6.7 million sperm samples to the Moon as a global insurance policy.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.

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Business

Stock Futures Rise, Pointing to Tech’s Rebound

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U.S. stock futures rallied Tuesday as a recent selloff in government bonds paused and giant technology stocks recovered some ground.

Futures tied to the S&P 500 gained 0.8%, suggesting that the broad market benchmark may climb after the New York opening bell. Dow Jones Industrial Average futures edged 0.5% higher. The blue-chips index notched a new intraday record on Monday.

Futures linked to the Nasdaq-100 rallied 2% Tuesday, indicating that technology shares are likely to rebound. The tech-heavy index and the broader Nasdaq Composite Index both fell into correction territory Monday, meaning that the gauges have declined more than 10% from recent highs.

Technology shares have come under pressure in recent weeks as a wave of selling in the bond market lifted Treasury yields. That led investors to question the high valuations that the technology sector is trading at following its steep climb in 2020.

The yield on the 10-year Treasurys ticked lower to 1.530% on Tuesday. It had ended the previous day at 1.594%, the highest level in over a year.

The stabilization in bond markets is likely to help technology shares recoup some of their losses, investors said. Money managers expect many companies in the sector to continue to benefit from increased online shopping and at-home access to media, entertainment and computing options even as Covid-19 lockdowns ease.

“It is this buy-the-dip mentality,” said Daniel Morris, chief market strategist at BNP Paribas Asset Management. “It’s not like we’ve changed our long-term view on tech. Everyone expects it to do well—it was just really expensive.”

U.S. lawmakers are on track to pass the latest version of the $1.9 trillion coronavirus stimulus package later this week. That has boosted investors’ confidence in the economy’s prospects and bolstered demand for stocks in companies that are likely to benefit from the economic rebound, such as banks and energy producers.

This rotation sent the Dow—which is weighted more heavily toward cyclical sectors—to notch its second highest close in history Monday.

Ahead of the market open, shares in

GameStop

gained more than 10%. The stock is climbing for a second day after the board tapped Chewy co-founder

Ryan Cohen

to lead a committee dedicated to transforming the retailer.

Some investors now expect that bond markets could calm as appetite for U.S. government debt revives following the sharp rise in yields. The 10-year Treasury yield was as low as 0.915% near the start of the year.

“We think a big part of the bond-yield move has played out,” said Hani Redha, a portfolio manager at PineBridge Investments. “At this level of yields, we do expect additional buyers to come in. That tends to stabilize the yield level.”

Overseas, the pan-continental Stoxx Europe 600 ticked up 0.6%.

The oil and gas sector in Europe climbed 1.6% as Brent-crude futures, the international gauge for oil prices, rose 1% to $68.92 a barrel.

In Asia, most major indexes were mixed by the close of trading. The Shanghai Composite dropped 1.8% and South Korea’s Kospi declined 0.7%. Japan’s Nikkei 225 advanced 1%.

The New York Stock Exchange on Monday.



Photo:

Lev Radin/Zuma Press

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Tech Stocks Poised to Decline as Bond Yields Rise

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U.S. stock futures dropped Monday and a selloff in U.S. government bonds extended into its sixth week after progress toward a new fiscal stimulus bill brightened economic prospects and sapped demand for technology stocks.

Futures linked to the S&P 500 slipped 0.6%, suggesting that the broad market may decline after the opening bell. The benchmark ended Friday up 0.8% for the week, following a volatile week in which investors rotated out of big technology stocks. Nasdaq-100 futures fell 1.5% at the start of the new week, pointing to tech stocks extending losses.

In the bond market, the yield on benchmark 10-year US. Treasurys ticked up to 1.592% as investors moved funds out of assets considered to be the safest in the world. Yields rise when bond prices fall. It had ended Friday at 1.551%, its highest since February 2020.

President Biden’s $1.9 trillion Covid-19 relief plan was approved in the Senate over the weekend, and faces a vote in the House as early as Tuesday. The additional fiscal spending is expected to bolster the pace of economic recovery and boost inflation. As the outlook brightens, money managers are moving out of government bonds and technology stocks, and into sectors such as banks and energy that are likely to rebound with the economy.

“Stimulus checks into people’s bank accounts will be a big propeller of growth, given the consumer in the U.S. makes up such a big part of U.S. growth,” said Shaniel Ramjee, a multiasset fund manager at Pictet Asset Management. “The underlying strength of the U.S. economy, growing expectations that the stimulus gets fully passed, plus inflation expectations rising because of oil: these are all likely to continue to push bond yields higher.”

Tech stocks have been retreating in recent weeks as vaccination programs advance and economic data point to the recovery being under way. The Nasdaq Composite Index declined over 2% last week, losing ground for a third consecutive week. That is because investors are betting that the largest media, communications and online-shopping companies will see a slower pace of growth as pandemic lockdowns end.

Traders worked on the floor of the New York Stock Exchange on Friday.



Photo:

Nicole Pereira/Associated Press

Ahead of the market open, giant tech stocks including Apple, Microsoft, Amazon.com, Alphabet and

Facebook

fell in early trading. Apple, the biggest company on the S&P 500 by market value, has dropped over 8% this year. Shares in Tesla, the electric-vehicle maker that was also a favorite among individual investors last year, fell over 3% premarket. It has lost more than 15% so far in 2021.

“The main market element is what’s happening in the yield market: The U.S. tech side is suffering from the current normalization in the cost of capital,” said Samy Chaar, chief economist at Lombard Odier. “The market is currently acknowledging that we’re in a recovery. Flows are rebalancing to better reflect this cyclical recovery.”

Among other stocks moving in premarket trading,

General Electric

rose 3.2%. The Wall Street Journal reported that the industrial conglomerate was nearing a $30 billion deal to combine its aircraft-leasing business with Ireland’s

AerCap.

Some tech stocks edged down, including Tesla, which slipped 4%, and Square which fell nearly 3%.

Overseas, the pan-continental Stoxx Europe 600 rose 0.6%, led by banking stocks. Europe’s stock market is benefiting from investors rotating into value stocks, analysts said.

Among individual stocks, ABN Amro climbed over 7%,

Banco de Sabadell

rose more than 5% and

Deutsche Bank

gained over 4%.

In Asia, most major benchmarks fell by the close of trading. The Shanghai Composite fell 2.3% and Hong Kong’s Hang Seng Index declined 1.9% as investors grappled with signs that Chinese policy makers will take more action to rein in debt and prevent asset bubbles from forming.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

As rising Treasury yields spook stock investors, March looms like a lion

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After a frenetic February, investors are probably hoping that March holds true to its proverb: In like a lion out like a lamb.

Indeed, February turned out to be a doozy, with benchmark bond yields, represented by the 10-year Treasury note
TMUBMUSD10Y,
1.415%
and the 30-year long bond
TMUBMUSD10Y,
1.415%,
ringing up their biggest monthly surges since 2016, according to Dow Jones Market Data.

The move was a stark reminder to investors that bonds, considered mundane and straight-laced by some investors, can wreak havoc on the market all the same.

A final flurry of trading, some $2.5 billion in sales near Friday’s close, created a major downside drag for stocks in the final few minutes of the session and may imply that there may be more air pockets ahead before the market steadies next week.

The Dow Jones Industrial Average
DJIA,
-1.50%
and S&P 500 index
SPX,
-0.48%
barely held above their 50-day moving averages, at 30,863.07 and 3,808.40, respectively, at Friday’s close.

‘An associated 10-20% sell-off in US equities would also focus minds. But before then, the pain currently being handed out to growth-tilted equity portfolios could get worse.’ Citigroup strategists

“The turmoil is probably not over,” wrote Independent market analyst Stephen Todd, who runs Todd Market Forecast, in a daily note.

Yet, for all the bellyaching about yields running hotter than expected, stocks in February still managed to bang out solid returns. For the month, the Dow finished up 3.2%, the S&P 500 notched a 2.6% gain in February, while the Nasdaq eked out a 0.9% return, despite a 4.9% weekly loss put in on Friday that marked the worst weekly skid since Oct.30.

Many have made the case that a selloff in the technology-heavy Nasdaq Composite was inevitable, especially with buzzy stocks like Tesla Inc.
TSLA,
-0.99%
only getting frothier by some measures.

“But the market has been overbought and extended all year and arguably for several months in late-2020,” wrote Jeff Hirsch, editor of the Stock Trader’s Almanac, in a note dated Thursday.

“After the big run-up in the first half of February folks have been looking for an excuse to take profits,” he wrote, describing February as the weak link in what’s usually the best six-month period of gains for the stock market.

The beneficiaries of the recent move in yields so far appear to be banks, which are benefitting from a steeper yield curve as long dated Treasury yields rise, and the S&P 500 financials sector
SP500.40,
-1.97%

XLF,
-1.91%
finished down 0.4%, which is, as it turns out, was the second-best weekly performance of the index’s 11 sectors behind energy
SP500.10,
-2.30%,
which surged 4.3%.

Utilities
SP500.55,
-1.86%
were the worst performer, down 5.1% on the week and consumer discretionary
SP500.25,
+0.58%
was second-worst, off 4.9%.

In February, energy logged a 21.5% gain as crude oil prices rose, while financials rose 11.4% on the month, booking the best and second-best monthly performances.

So what’s in store for March?

“Typical March trading comes in like a lion and out like a lamb with strength during the first few trading days followed by choppy to lower trading until mid-month when the market tends to rebound higher,” Hirsch writes.

March also sees “triple witching: occur on the third Friday, when stock options, stock-index futures and stock-index option contracts expire simultaneously.

Ultimately, seasonal trends suggest that March will be wobbly and could be used as an excuse for further selling, but on that downturn may be cathartic and give way to further gains in the spring.

“Further consolidation is likely in March, but we expect the market to find support shortly and subsequently challenge the recent highs again,” writes Hirsch, noting that April is statistically the best month of the year.


Stock Trader’s Almanac

Looking beyond seasonal trends, it isn’t certain how the rise in bond yields will play out and ultimately ripple through markets.

On Friday, the benchmark 10-year note closed at a yield of 1.459% based on 3 p.m. Eastern close, and hit an intraday peak at 1.558%, according to FactSet data. The dividend yield for S&P 500 companies in aggregate was at 1.5%, by comparison, while the Dow it is 2% and for the Nasdaq Composite is 0.7%.

As to the question of to what degree rising yields will pose a problem for equities, strategists at Citigroup make the case that yields are likely to continue to rise but the advance will be checked by the Federal Reserve at some point.

“It is unlikely that the Fed will let US real yields rise much above 0%, given high levels of public and private sector leverage,” analysts on Citi’s global strategy team wrote in a note dated Friday titled “Rising Real Yields: What to do.”

Real adjusted yields are typically associated with rates on Treasury inflation-protected securities, or TIPS, which compensate investors based on expectations for inflation.

Real yields have been running negative, which have been arguably encouraging risk taking but the coronavirus vaccine rollouts, with a Food and Drug Administration panel on Friday recommending approval for Johnson & Johnson’s
JNJ,
-2.64%
one-jab vaccine and the prospects for further COVID aid from Congress, are raising the outlook for inflation.

Citi notes that the 10 year TIPS yields dropped below minus 1% as the Fed’s quantitative easing last year was kicked off to help ease stresses in financial markets created by the pandemic, but in the past few weeks the strategists note that TIPs had climbed to minus 0.6%.

Read: Here’s what one hedge fund trader says happened in Thursday’s bond-market tantrum, which sent the 10-year Treasury yield to 1.60%

Citi speculates that the Fed might not intervene to stem disruptions in the market until investors see more pain, with the 10-year potentially hitting 2% before alarm bells ring, which would bring real yields closer to 0%.

“An associated 10-20% sell-off in US equities would also focus minds. But before then, the pain currently being handed out to Growth-tilted equity portfolios could get worse,” the Citi analysts write.

Check out: Cracks in this multidecade relationship between stocks and bonds could roil Wall Street

Yikes!

The analysts don’t appear to be adopting a bearish posture per se but they do warn that a return to yields that are closer to the historically normal might be painful for investors heavily invested in growth stock names compared against assets, including energy and financials, that are considered value investments.

Meanwhile, markets will be looking for more clarity on the health of the labor market this coming Friday when nonfarm payrolls data for February are released. One big question about that key gauge of the health of U.S. employment, beyond how the market will react to good news in the face of rising yields, is the impact the colder than normal February weather have on the data.

In addition to jobs data, investors will be watching this week for manufacturing reports for February from the Institute for Supply Management and construction spending on Monday. Services sector data for the month are due on Wednesday, along with a private-sector payroll report from Automatic Data Processing.

Read: Current bond-market selloff worse than ‘taper tantrum’ in one key way, argues analyst

Also read: 3 reasons the rise in bond yields is gaining steam and rattling the stock market

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Global Markets Fall After Bond Yields Surge

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International stocks dropped Friday, tracking declines in U.S. indexes, as a selloff in bonds helped dent investor appetite for richly valued shares.

However, U.S. Treasury notes rose in price, regaining some of the previous session’s losses, and futures suggested stocks in New York could stabilize or gain slightly in Friday trading.

Investors said the market had been reassessing prospects for interest-rate increases by the U.S. Federal Reserve, despite assurances from Chairman

Jerome Powell

that the central bank won’t raise rates anytime soon.

“What has happened in recent weeks is the markets have had to reprice expectations of the Federal Reserve’s rate hikes,” said Dwyfor Evans, head of macro strategy for the Asia-Pacific region at State Street Global Markets in Hong Kong.

He said the pickup in bond yields would have knock-on effects on areas such as corporate lending and mortgage rates. “That’s why equities will come under pressure here, because rising yields will have some impact on the real [economy] and earnings might have to slow,” Mr. Evans said.

By early afternoon Friday in Hong Kong, major benchmarks there and in Japan had fallen more than 2%, as had China’s CSI 300 Index, which includes large stocks listed in either Shanghai or Shenzhen. South Korea’s Kospi Composite fell more than 3%.

In Asia, as in the U.S., some of the biggest declines came in highflying technology shares.

SoftBank Group,

Samsung Electronics

and

Taiwan Semiconductor Manufacturing Co.

all dropped more than 3%, while Chinese food-delivery giant Meituan tumbled 5.9%.

Higher bond yields suggest the U.S. economy is returning to normal, which should bode well for corporate earnings. But they also improve the relative appeal of bonds compared to stocks, and can cause investors to reassess how much they should pay now for expected future profits—a particular problem for fast-growing tech stocks.

“Given the market has already rallied over the past 10 months, you are seeing quite a bit of profit-taking,” said Ken Wong, a portfolio manager at Eastspring Investments. Mr. Wong said rising borrowing costs were already causing some market participants to unwind positions bought using leverage, while expensive valuations were also fueling caution.

As of Thursday, the MSCI AC World index traded at a price of 20 times expected earnings, according to Refinitiv data, a 37% premium to the average of the last 10 years.

On Thursday, the S&P 500 retreated 2.4% and the Nasdaq dropped 3.5%, as the yield on the 10-year Treasury note rose to a one-year high above 1.5%. Bond yields move inversely to prices.

But futures suggested the stocks selloff might not extend much further in U.S. markets Friday, with those on the S&P 500 declining 0.1% and Nasdaq-100 futures down 0.5%.

In Asian trading, the yield on the 10-year Treasury declined 0.017 percentage point to 1.498%, according to Tradeweb.

Some regional bond markets followed Thursday’s U.S. selloff, with Australian benchmark yields rising to 1.87%, the highest since 2019.

In Japan, 10-year yields also hit a multiyear high, at 0.16%. Since 2016, the Bank of Japan has kept 10-year rates at around zero under its yield-curve control policy, though in recent years it has permitted rates to overshoot or undershoot by as much as 0.2 percentage points.

Write to Xie Yu at Yu.Xie@wsj.com

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Despite surging stocks and home prices, U.S. inflation won’t be a problem for some time

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When America’s amusement parks and baseball stadiums no longer must serve as COVID-19 mass vaccination sites, some investors believe that households pocketing pandemic financial aid from the government might start to splurge.

While a consumer splurge could initially boost the parts of the economy devastated by the pandemic, a bigger concern for investors is that a sustained spending spree also could cause prices for goods and services to rise dramatically, dent financial asset values, and ultimately raise the cost of living for everyone.

“I don’t think inflation is dead,” said Matt Stucky, equity portfolio manager at Northwestern Mutual Wealth Management Company. “The desire by key policy makers is to have it, and it’s the strongest it’s ever been. You will see rising inflation.”

Wall Street investors and analysts have become fixated in recent weeks on the potential for the Biden Administration’s planned $1.9 trillion fiscal stimulus package that targets relief to hard-hit households to cause inflation to spiral out of control.

Economists at Oxford Economics said on Friday they expect to see the “longest inflation stretch above 2% since before the financial crisis, but it’s unlikely to sustainably breach 3%.”

Severe inflation can hurt businesses by ratcheting up costs, pinching profits and causing stock prices to fall. The value of savings and bonds also can be chipped away by high inflation over time. 

Another worry among investors is that runaway inflation, which took hold in the late 1970s and pushed 30-year mortgage rates to near 18%, could force the Federal Reserve to taper its $120 billion per month bond purchase program or to raise its benchmark interest rate above the current 0% to 0.25% target sooner than expected and spook markets.

At the same time, it’s not far-fetched to argue that some financial assets already have been inflated by the Fed’s pedal-to-the-metal policy of low rates and an easy flow of credit, and might be due for some cooling off.

U.S. stocks, including the Dow Jones Industrial Average
DJIA,
+0.09%,
S&P 500 index
SPX,
+0.47%
and Nasdaq Composite
COMP,
+0.50%
closed on Friday at all-time highs, while debt-laden companies can now borrow in the corporate “junk” bond, or speculative-grade, market at record low rates of about 4%.

Read: Stock market stoked by stimulus hopes — what investors are counting on

In addition to rallying stocks and bonds, home prices in the U.S. also have gone through the roof during the pandemic, despite the U.S. still needing to recoup almost as many jobs from the COVID-19 crisis as during the worst of the global financial crisis in 2008.

This chart shows that jobs lost to the pandemic remain near to levels seen in the aftermath of that last crisis.

Job losses need to be tamed


LPL Research, Bureau of Labor Statistics

Fed Chairman Jerome Powell said Wednesday that he doesn’t expect a “large or sustained” outbreak of inflation, while also stressing that the central bank remains focused on recouping lost jobs during the pandemic, as the U.S. looks to makes serious headway in its vaccination program by late July. 

Treasury Secretary Janet Yellen on Friday reiterated a call on Friday that the time for more, big fiscal stimulus is now.

“Broadly, the guide is, does it cost me more to live a year from now than a year prior,” Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, said about inflation in an interview with MarketWatch.

“I think what we need to watch is wage inflation,” he said, adding that higher wages for upper income earners were mostly flat for much of the past decade. Also, many lower-wage households hardest hit by the pandemic have been left out of the past decade’s climb in financial asset prices and home values, he said.

“For the folks who haven’t taken that ride, it feels like a perpetuation of inequality that’s played out for some time,” he said, adding that the “only way to get broad inflation is with a broad overheating of the economy. We have the exact opposite. The bottom third are no where near overheating.”

Klingelhofer said it’s probably also a mistake to watch benchmark 10-year Treasury yields for signs that the economy is overheating and for inflation since, “it’s not a proxy for inflation. It’s just a proxy for how the Fed might react,” he said.

The 10-year Treasury yield
TMUBMUSD10Y,
1.209%
has climbed 28.6 basis points in the year to date to 1.199% as of Friday.

But with last year’s sharp price increases, is the U.S. housing market at least at risk of overheating?

“Not at current interest rates,” said John Beacham, the founder and CEO at Toorak Capital, which finances apartment buildings and single family rental properties, including those going through rehabilitation and construction projects.

“Over the course of the year, more people will go back to work,” Beacham said, but he added that it’s important for policy makers in Washington to provide a bridge for households through the pandemic, until spending on socializing, sporting events, concerts and more can again resemble a time before the pandemic.

“Clearly, there likely will be short-term consumption increase,” he said. “But after that it normalizes.”

The U.S. stock and bond markets will be mostly closed on Monday for the Presidents Day holiday.

On Tuesday, the only tidbit of economic data comes from the New York Federal Reserve’s Empire State manufacturing index, followed Wednesday by a slew of updates on U.S. retail sales, industrial production, home builders data and minutes from the Fed’s most recent policy meeting. Thursday and Friday bring more jobs, housing and business activity data, including existing home sales for January.

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