(Bloomberg) — US stocks surged and a rally in Treasuries waned after a reading on inflation expectations eased and the Federal Reserve’s James Bullard suggested recession fears are overdone.
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The S&P 500 jumped more than 2%, putting it on track to snap a three-week decline. Sentiment improved further after the University of Michigan’s gauge of longer-term consumer inflation expectations settled back from an initially reported 14-year high, potentially reducing the urgency for steeper rate hikes. St. Louis Fed President Bullard, considered the biggest hawk among Fed officials, said worries over a US recession are overblown.
Traders are starting to price out any Fed action on rates beyond the December meeting, scaling back the additional tightening they expect and flirting with the possibility of cuts by in 2023. But they are still grappling with the question of what comes next if an economic downturn takes hold.
“It’s a sort of a tug of war here between concerns about a global growth slowdown and a recession and the potential that there’s already a lot of it in the price,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management. “Investors are considering whether or not markets are oversold at this point.”
Fed Chair Jerome Powell hardened his resolve to cool inflation in testimony to lawmakers this week, after acknowledging that a recession may be the price to pay.
Treasury yields climbed after struggling for direction earlier in the session, with the 10-year yield around 3.12%.
“The volatility in the fixed income market has been even higher than the equity market when you take the move versus the VIX,” said John Flahive, head of fixed income investments at BNY Mellon Wealth Management. “That’s been really underpinning all the uncertainty across all the capital markets and one of our catalysts needed to kind of calm down the equity market, to get a bit of a footing, would really be for the bond markets to calm down.”
Investors continued to yank cash from equity funds,…