On Thursday, the US stock market showed mixed performance, while benchmark Treasury yields trended higher. This shift came as a result of encouraging economic data, which eased concerns about a possible recession but also raised expectations of a prolonged period of restrictive policies by the Federal Reserve.
Financial stocks led gains, boosted by Federal Reserve stress test results that indicated U.S. lenders had enough capital to withstand the economic turbulence.
Among the three major US stock indices, the Dow Jones Industrial Average fared better, posting significant gains, while the S&P 500 saw marginal growth. In contrast, the Nasdaq Composite remained in negative territory due to the drag caused by interest rate-sensitive mega-cap stocks.
In a noteworthy development, small-cap stocks stood out as clear winners, with the Russell 2000 advancing a notable 1.2% gain.
Commenting on the market dynamics, Michael Green, chief strategist at Simplify Asset Management in Philadelphia, said: “Throughout this year, we have seen a narrow rally occasionally interrupted by participation in smaller stocks. I think the market may have advanced further than it should, leaving many observers baffled by the lack of a pullback in valuation.”
The unexpected drop in initial jobless claims and a substantial upward revision to first-quarter GDP provided further evidence of the resilience of the US economy. This data solidified expectations that the Federal Reserve would raise interest rates at least once, and potentially twice, during the year.
Green added: “Market sentiment currently reflects a ‘good news is bad news’ scenario. As long as economic data remains strong, the Federal Reserve can comfortably proceed to raise rates or maintain a restrictive policy stance for an extended period.”
Market expectations, as measured by CME’s FedWatch tool, indicate an 87% probability of a 25 basis point increase in the federal funds target rate following the conclusion of the next monetary policy meeting in July.
On Thursday, the Dow Jones Industrial Average gained 137.45 points, or 0.41%, to close at 33,990.11. The S&P 500 saw a modest gain of 1.7 points, or 0.04%, reaching 4,378.56, while the Nasdaq Composite saw a drop of 40.47 points, or 0.3%, ending the day at 13,551.28.
In European markets, stocks rose after better-than-expected US economic data. This helped ease concerns about a global economic slowdown and the impact of hawkish signals from global bank leaders.
The pan-European STOXX 600 index posted a 0.11% gain, while the MSCI global equity gauge remained relatively stable.
Emerging market stocks, however, saw a 0.60% drop and MSCI’s broadest index of Asia-Pacific shares outside Japan closed down 0.57%. In contrast, Japan’s Nikkei index rose 0.12%.
Treasury yields rose in response to positive economic reports, confirming the strength of the US economy and reinforcing expectations of a “higher for longer” scenario for tight monetary policies.
Benchmark 10-year bonds saw a 35/32 decline in price, resulting in a yield of 3.8461%, compared to 3.712% at the end of the trading session on Wednesday.
Similarly, the 30-year bond saw a price drop of 55/32, leading to a yield of 3.9035%, down from 3.804% on Wednesday.
The US dollar gained strength against a basket of currencies, boosted by encouraging economic data.
The dollar index rose 0.31% and the euro fell 0.22% to $1.0887.
Against the dollar, the Japanese yen weakened 0.10%, trading at 144.66 yen per dollar, while the pound sterling closed the day at $1.2617, down 0.18%.
In the commodities market, oil prices continued their upward momentum, buoyed by strong economic data, which indicated solid demand and a more significant-than-expected decline in US crude oil inventories.
US crude oil rose 0.96% to $70.23 per barrel, while Brent crude oil settled at $75.05, up 1.09% on the day.
Gold prices hovered around the key $1,900 level, with gains hampered by the strengthening dollar.
Spot gold rose 0.3% to close at $1,912.29 per ounce.
As the US market reacts to positive economic indicators and prospects for monetary policy tightening, investors remain attentive to future developments, particularly any changes in the Federal Reserve’s stance on interest rates and the global economic outlook.
Also read: US Stocks Wall Street Expects Drop as Chip Stocks Falter; The market awaits Powell’s speech