US stocks rise after worst week; Tesla rallies on production news. Dow Jones & S&P 500 suffer losses on fears of tighter monetary policy & inflation.
The week started on a positive note for US stocks as investors purchased stocks that had experienced significant declines following the worst weekly performance of stock indices this year, amid growing concerns about tighter monetary policy. However, treasury bond yields remain at their highest levels in the past four months, with the US 10-year bond yield standing at 3.93%.
On Friday, the Dow Jones 30 index lost all its gains for the year, while the S&P 500 recorded its third consecutive week of losses due to concerns that strong economic data and persistent inflation could lead the Fed to raise interest rates further.
However, on Monday, the mood became slightly more positive after a slight decline in US Treasury yields, which led to an increase in interest rate-sensitive growth stocks such as Apple and Amazon.com, with both experiencing gains of over 1%.
Tesla's stock rallied by 5% on Monday after the company announced that its Brandenburg plant in Germany was producing 4,000 cars a week, three weeks ahead of schedule according to the revised production plan. This follows a sharp decline in the previous week that had pushed many stocks and indices into areas close to being oversold. Monday's rally could be seen as a technical correction in response to the oversold conditions.
Historically, February is considered the second-worst month of the year for the stock market. Therefore, investors are expected to remain cautious and keep a close watch on economic data, especially the unemployment rate and non-farm payrolls figures that are due to be released at the end of next week.
The yields of the two-year bonds, which are the most sensitive to short-term rate expectations, dropped yesterday after reaching a nearly four-month high earlier in the trading day.
Related: What are bonds and how do they work?
Investor forecasts about the upcoming Federal Reserve decision have shifted, leading to the change in the bond yields. This change is mainly due to bets on a 50 basis point rate hike in March after data last week showed that the Personal Consumption Expenditures price index, which is the figure by which the Fed measures its inflation target from 2%, rose to 5.4% last month.
Federal funds futures are currently indicating that interest rates could rise to a maximum of 5.39% in September, which is almost 30 basis points higher than previous forecasts. If this forecast is realized, it could potentially limit the upward trend of stock markets and help curb the weakness of the US dollar.
Sources: Bloomberg, Reuters