Wall Street Speaks: Blackstone sights slowdown and bond divergence

Welcome to the Business Posts’s Wall Street Speaks, where we recap the most significant developments on the US markets in the last seven days.

Traders sold US Treasuries on Friday after a gauge of consumer inflation expectations unexpectedly rose.

Two-year yields rose as much as five basis points to 4.8655 per cent after the University of Michigan’s latest sentiment survey showed a pickup in short-term inflation expectations.

The stock market struggled to gain much traction after the posting.The S&P 500 hovered near 5,220 on Friday, down from previous close of trade but marking its third straight week of gains — the longest winning run since February. The Dow Jones Industrial Average rose for an eighth straight session.

Let’s take a look at the economic trends and market predictions that steered investor performance last week:

Jon Gray: ‘Economic growth is slowing’

Patience is a virtue - one the US Federal Reserve is happy to exercise for the time being, according to Jon Gray.

With the European Central Bank still on course to cut interest rates in June, and Bank of England last week touting an August reduction, eyes are on the Fed, and when it will begin to ease monetary policy.

Gray, the president of Blackstone, is forecasting a slowdown in economic growth as stubborn inflation weighs on the US, which he said will hamper the Fed’s ability to begin lowering borrowing costs.

“We see a deceleration of growth,” Gray said at the Macquarie Australia Conference in Sydney on Thursday. “Central banks will be slow on the cutting of rates, because they don’t want to see a rise of inflation,” he said.

“The Fed will be patient, they’ll have the opportunity to cut once this year,” he added.

Markets are reassessing the trajectory for the economy as Fed policymakers indicate the two-decade high US rates may need to be maintained for longer than previously thought in order to reduce price pressures. Jerome Powell, the Fed chair, last week said more work was needed to gain confidence that inflation was returning to the 2 per cent target in order to cut rates.

Gray said his growth expectations were “lower than consensus,” explaining he saw “not a cliff but a sequential deceleration of growth and inflation continuing to come down, but at a slower pace.”

Top bond forecasters diverge

Anshul Pradhan and Stephen Stanley both saw the current US bond market coming. They just don’t agree on where it’s going.

Pradhan, the head of US rates strategy at Barclays Capital, and Stanley, the chief economist at Santander US Capital Markets, have been two of the most accurate Wall Street bond forecasters surveyed by Bloomberg so far this year.

Each predicted roughly how much Treasury yields would rise during the first quarter — and broke with others by expecting rates to stay up through the end of June as sticky inflation kept the Federal Reserve on hold.

But the two are now parting ways.

Pradhan says that 10-year yields, currently around 4.5 per cent, will likely push higher — possibly re-testing the 16-year peak of 5 per cent that was hit in October — as the US economy keeps powering ahead.

“The US economy is going to be far more resilient than what the consensus is expecting,” Pradhan said in an interview. “The progress on inflation is going to be slower than what most people are forecasting.”

Stanley, by contrast, says the bond market has turned the corner: He expects the benchmark yield to hold steady through June and drift down to 4 per cent by December, anticipating that the Fed will have leeway to start taking its foot off the brakes.

He is sticking to his forecast that the Fed will cut in November and December, but acknowledged that this call is “in a little bit of jeopardy” following the recent run of hot inflation prints.

Still, with the Fed unlikely to resume raising rates, he thinks Treasury yields are likely to fall in the second half of the year as the Fed edges closer toward a pivot.

“Unless you come to the view that the Fed might actually hike rates, there’s probably not much more of an adjustment that needs to be made,” said Stanley.

Sell in May? Not this year!

The transition of spring to summer brings the recirculation of the old investment adage: ‘Sell in May and go away’.

The origin of the strategy comes from Britain where the full phrase is ‘Sell in May and go away, don't come back until St Leger’s Day’.

“The theory behind the idea probably stems from the time when trading was an in-person activity, which took place on the floor of the stock exchange,” Victoria Hasler, head of fund research at Hargreaves Lansdown, a British investment platform, said.

“Investors were often wealthy individuals who would go away over the summer months to enjoy the leisure pursuits that the countryside offered, returning after the last major horse racing meet of the year, the St Leger’s Stakes, which usually took place around the middle of September.”

Its prevalence nowadays, however, is such that Bank of America (BoA) told investors in a note last Tuesday that it was a bad idea this year in particular because presidential election years bring big summer rallies.

Analysis from the banking giant shows that between June and August is the second strongest three-month period of the year for all years going back to 1928, with the S&P 500 up 65 per cent of the time on an average return of 3.2 per cent.

Meanwhile, in presidential election years, the S&P 500 is up 75 per cent in the same period on an average return of 7.3 per cent.

The bank stated that it views the US high yield option-adjusted spread (OAS) as a leading indicator for the US equity market. A decline in this index to new lows last week is “a bullish leading indicator that supports the case for a 2024 summer rally on the SPX,” BoA said.

This policy is also the focus of Kathleen Gallagher’s markets column, which examines if the proverb rings true for Euronext Dublin, and should be of particular interest for Iseq investors.

– With reporting from Bloomberg