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Morning Bid: Mayday for bonds as 2024 Fed cut hopes dwindle

[May 01, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

May Day for Wall Street comes with the daunting prospect that the multiple interest rate cuts once expected from the Federal Reserve this year might now just be just one - if any.

Facing another $1.1 trillion in new Treasury debt sales over the coming two quarters, Tuesday's jarring news that U.S. employment cost growth accelerated during the first three months of the year was the latest blow to bond markets already struggling with a hawkish Fed.

With Wednesday's Fed decision unlikely to offer much encouragement on rates, futures markets have reduced 2024 easing expectations to just 27 basis points (bps). A quarter-point cut is now not fully priced until the Dec. 18 central bank meeting - well after November's election.

Two-year Treasury yields topped 5% again on Tuesday to hit their highest for the year - barely 32 bps below the current Fed policy rate - and 10-year yields crept back above 4.7%. And exchange-traded funds capturing longer-term Treasury bonds are clocking losses of more than 10% for the first four months of the year.

With Japan's ailing yen still on the back foot despite Monday's official intervention to support it and Switzerland's sliding franc leading the way in Europe, the dollar index is stalking six-month highs. Bitcoin plummeted to its lowest in more than two months.

Navigating this week's torrent of corporate earnings reports alongside the rates markets rumble, Wall St stocks recorded their worst day since January, with both the S&P500 and Nasdaq clocking monthly losses of more than 4%.

And stock futures remain in the red first thing - with even megacap Amazon's earnings beat after the bell on Tuesday doing little to lift the broader mood even as its shares rose in out-of-hours trading.

And adding to the gloom was an miss from one of the past year's artificial intelligence darlings, Super Micro Computers, sending its stock down 14% after the bell. AMD's AI chip sales forecast also underwhelmed and its shares fell 7% too.

All too negative? Some suggest month-end trading on Tuesday and market holidays across much of Asia and continental Europe on Wednesday may have exaggerated the moves.

But it's hard to escape the discomfort in the bond market.

Possible straws in the wind for inflation-anxious Treasuries include a retreat in U.S. crude oil prices to their lowest in more than a month amid Gaza ceasefire hopes and Tuesday's weakening U.S. consumer confidence readings for April.

FOCUS ON POWELL

What's more, the employment cost hit for the first quarter may yet be trumped by this week's series of April labor market updates - starting with ADP's private sector payrolls update later today and culminating in the full national employment report on Friday. March job openings data are also due on Wednesday.

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A trader works as a screen displays a news conference by Federal Reserve Board Chairman Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., December 13, 2023. REUTERS/Brendan McDermid/File Photo

And while the Fed is unlikely to sound dovish on the policy rate outlook at Chair Jerome Powell's press conference later in the day, there's considerable focus on Fed discussions about slowing the rundown of Treasuries from its balance sheet.

On top of that, the Treasury itself also publishes details of its quarterly refunding process with indications on auction sizes and maturity buckets.

Another heavy earnings diary for stocks is perhaps overshadowed by the Fed meeting and bond market angst and Apple is due to report on Thursday.

With many major markets closed on Wednesday, the macro markets focus overseas remains on the still-fragile yen and continues to probe 158 per dollar - some 1.5% weaker than it was early last Friday despite Monday's intervention bout at 160.

Japan's ruling Liberal Democratic Party is examining the possibility of introducing measures to provide tax breaks for companies converting foreign profits into the yen, two senior party officials told Reuters. The tax holiday may be deployed as a policy tool to stem the yen's sharp declines, incentivizing firms to return overseas profits to Japan.

Key diary items that may provide direction to U.S. markets later on Wednesday:

* Federal Reserve delivers latest policy decision, statement and press conference

* US April ADP private sector payrolls, March JOLTS job openings data, ISM's April US manufacturing survey, S&P Global's final April manufacturing survey, US March construction spending

* US corporate earnings: Pfizer, Kraft Heinz, MetLife, eBay, Qualcomm, Mastercard, Automatic Data Processing, Marriott, Dupont De Nemours, Global Payments, CVS, Marathon Oil, Mosaic, Eversource, Yum! Brands, ETSY, Estee Lauder, Albemarle, PPL, Paycom Software, Devon Energy, Generac, Aflac, Cognizant Technology, Ventas, Allstate, MGM Resorts etc

* US Treasury details quarterly refunding schedules and auction sizes

* Bank of Canada Governor Tiff Macklem testifies to Senate committee

(By Mike Dolan, editing by Alex Richardson mike.dolan@thomsonreuters.com)

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