(Bloomberg) — Stocks rose after the Federal Reserve refrained from signaling any changes to its bond-buying program any time soon. Treasuries fluctuated.
“Participants noted that it would likely be some time until substantial further progress toward the Committee’s maximum-employment and price-stability goals would be realized,” according to minutes from the March 16-17 Federal Open Market Committee meeting published Wednesday.
Earlier in the day, Fed Bank of Dallas President Robert Kaplan predicted a strong economic rebound, with inflation possibly rising “well in excess” of 2.5%, before settling back. Meanwhile, Fed Bank of Chicago President Charles Evans played down the recent rise in longer-term bond yields.
“The rate side is still somewhat front and center, and probably the biggest risk to what is going on with equity valuations,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management. “Clearly, there’s been a repricing of inflation expectations higher this year, and at times, the stock market has struggled with it. I would say that’s to me the biggest risk at this point — that inflation readings start to come in to the point where the Fed potentially has to alter their plans.”
Rates are going higher for the “next several months, just like they have over the previous several months,” Jim Bianco, president of Bianco Research, said on a Bloomberg Television interview. Bond yields have recently fallen because they’ve had a “relentless rise,” he noted.
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If yields are going up because the economy is reopening and massive real growth is expected, that “won’t bother the economy or the stock market,” Bianco said. “But if interest rates are going up because of inflation,” which is a loss of purchasing power, “that’s a problem for the economy and the stock market, and we’re going to continue to have that debate.”
Credit markets have yet to signal any type of impending weakness ahead for U.S. stocks, according to Ian McMillan, a market technician at Client First Tax & Wealth Advisors. He compared the S&P 500 with the yield gap between some of the lowest-rated high-yield bonds and Treasuries. This week began with the gap for the Bloomberg Barclays Caa U.S. High Yield Index moving to its narrowest level since July 2018. A widening of high-yield spreads would be a caution signal for equities, he wrote.
Some key events to watch this week:
The 2021 Spring Meetings of the IMF and the World Bank Group take place virtually. Federal Reserve Chairman Jerome Powell takes part in a panel about the global economy on Thursday.Japan releases its balance of payments numbers Thursday.China’s consumer and producer prices data are due Friday.
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