By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
Despite 'in-line' PCE data, the market's intraday reversal and yield curve's resilience suggest investors are pricing in 'higher for longer' rates, signaling a challenging environment for equities and growth names.
Risk: The 10-year yield near 4.35% implies a higher discount rate for cash flows, pressuring valuations, especially for growth names.
Opportunity: A potential opportunity exists in sector rotation into cyclicals like banks and networking stocks, hunting for idiosyncratic M&A alpha.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
(RTTNews) - After moving mostly higher early in the session, stocks have given back ground over the course of the trading day on Friday. The major averages have pulled back well off their highs of the session, briefly dipping into negative territory.
Currently, the major averages are posting modest gains. The Dow is up 41.40 points or 0.1 percent at 39,205.46, the Nasdaq is up 0.57 points or less than a tenth of a percent at 17,859.25 and the S&P 500 is up 5.52 points or 0.1 percent at 5,488.39.
The early strength on Wall Street came following the release of a Commerce Department report showing readings on consumer price inflation in the month of May came in line with economist estimates.
The report said the personal consumption expenditures (PCE) price index came in unchanged in May after rising by 0.3 percent in April, while the annual rate of growth slowed to 2.6 percent from 2.7 percent.
The core PCE price index, which excludes food and energy prices, inched up by 0.1 percent in May after climbing by an upwardly revised 0.3 percent in April.
The annual rate of growth by core prices also slowed to 2.6 percent in May from 2.8 percent in April, in line with economist estimates.
While the data initially generated renewed optimism about the outlook for interest rates, buying interest has waned over the course of the session.
The subsequent pullback by the markets may reflect a negative reaction to a turnaround by treasury yields, which initially moved lower following the release of the data but have subsequently rebounded firmly into positive territory.
Treasury yields have advanced as some analysts pointed out that pace of consumer price growth remains well above the Federal Reserve's 2.0 percent target and suggested the latest data is not likely to convince the central bank to accelerate its plans to lower rates.
"While an improvement from trends earlier this year, the elevated inflation readings in yesterday's revised GDP data indicate persistent pricing pressures," said John Lynch, Chief Investment Officer for Comerica Wealth Management.
"The expected number of rate cuts for this year have steadily declined, but traders continue to ignore the Fed's higher for longer stance," he added. "Since the fed funds rate remains higher than nominal GDP growth, we believe the Fed will need to cut 1-2 times over the next six months. Any hope for further accommodation, absent recession, is likely misguided."
Sector News
Despite the pullback by the broader markets, networking stocks continue to see substantial strength on the day, with the NYSE Arca Networking Index surging by 2.4 percent.
Infinera (INFN) has led the sector higher, spiking by 18.2 percent after the telecom equipment maker agreed to be acquired by Noka (NOK) for $2.3 billion.
Considerable strength also remains visible among banking stocks, as reflected by the 2.0 percent jump by the KBW Bank Index.
Steel, semiconductor and oil service stocks are also seeing notable strength, while utilities stocks have moved to the downside.
Other Markets
In overseas trading, stock markets across the Asia-Pacific region moved mostly higher during trading on Friday, Japan's Nikkei 225 Index climbed by 0.6 percent, while China's Shanghai Composite Index advanced by 0.7 percent.
Meanwhile, the major European markets turned in a mixed performance on the day. While the German DAX Index inched up by 0.1 percent, the U.K.'s FTSE 100 Index dipped by 0.2 percent and the French CAC 40 Index slid by 0.7 percent.
In the bond market, treasuries have come under pressure over the course of the session after seeing initial strength. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is up by 5.7 basis points at 4.345 percent.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"Modest gains mask renewed skepticism that today's PCE data will accelerate Fed easing, keeping the 10-year yield above 4.3% a near-term cap on multiple expansion."
The PCE print met expectations with core slowing to 2.6% y/y, initially lifting equities on rate-cut hopes. Yet the subsequent fade, rebound in 10-year yields to 4.345%, and commentary that inflation remains well above target signal markets are again pricing in 'higher for longer.' Networking (INFN +18% on NOK buyout) and banks lead, but the broad indices are barely positive at 0.1%. Missing context: real yields are rising while nominal GDP growth lags the fed funds rate, supporting Comerica's view of only 1-2 cuts through year-end.
If tomorrow's employment report shows cooling labor demand, the bond-market reversal could prove a head-fake; markets have repeatedly repriced cuts higher on each soft inflation print, and the article downplays that the annual core PCE deceleration is still directionally helpful for a September cut.
"The market is shifting from a 'rate-cut-hope' trade to a 'valuation-compression' reality as Treasury yields decouple from cooling inflation data."
The market's intraday reversal despite 'in-line' PCE data reveals a growing fragility: investors are no longer satisfied with mere disinflation; they are now fixated on the yield curve's reaction. The 5.7 basis point climb in the 10-year Treasury yield to 4.345% suggests the 'higher-for-longer' reality is finally overriding the soft-landing narrative. While the 2.6% core PCE is progress, it remains structurally sticky. The rotation into banking (KBW Bank Index +2.0%) and networking (NYSE Arca Networking Index +2.4%) indicates a market hunting for idiosyncratic M&A alpha (like the INFN-NOK deal) rather than broad-based index participation, signaling that the 'easy' money from broad multiple expansion is likely exhausted.
The market's intraday pullback could simply be end-of-quarter rebalancing rather than a fundamental shift in sentiment regarding the Fed's terminal rate.
"The market's rejection of dovish PCE data in favor of rising yields signals the Fed's credibility on rate cuts has collapsed, and equities are repricing for a longer period of restrictive policy than consensus expects."
The market's intraday reversal is the real story here, not the PCE data itself. Yes, inflation came in line with estimates—but that's priced in. The crucial tell: Treasury yields rebounded 5.7bps despite 'good' inflation news, signaling traders have abandoned rate-cut hopes. Lynch's comment about the Fed's 'higher for longer stance' being ignored is spot-on. The sector rotation into cyclicals (banks +2%, steel, semis) while utilities sold off suggests a bifurcated market betting on either persistent rates or recession hedging. The INFN/NOK deal is noise. What matters: if core PCE at 2.6% can't trigger yield compression, the bar for Fed cuts just moved higher—potentially into late 2024 or beyond.
The article frames this as disappointment, but 2.6% core PCE is genuinely closer to the Fed's 2% target than six months ago. If this trend continues, even 'higher for longer' eventually means cuts; the market's pessimism could be overdone.
"Even with in-line inflation, a stubbornly high-rate backdrop and rising yields keep downside risk for equities until inflation decisively trends below target and the Fed signals real rate cuts."
Question the headline reading: in-line May PCE suggests inflation is not spiraling, supporting a soft landing; but the reaction—yields higher again and only modest equity gains—signals that investors still price in restrictive policy. A key risk glossed over: the 10-year yield near 4.35% implies a higher discount rate for cash flows, pressuring valuations, especially for growth names. Also, 'higher for longer' is a policy stance, not a forecast; any data surprises (wage, services inflation, or a hotter GDP print) could tighten policy further. Missing context includes Fed communications (dot plot, QT pace) and revisions to GDP/inflation in coming months.
Strongest counter-argument: if inflation continues to cool and growth slows without a spike in financial conditions, yields could stabilize or fall, lifting equities. The article’s caution about 'higher for longer' may already be priced in, and a constructive data surprise could trigger multiple expansion rather than a fall.
"Yield rebound is more technical than a permanent repricing of the terminal rate if disinflation trend persists."
Claude's claim that the bar for Fed cuts has moved into late 2024 or beyond ignores the forward-looking nature of markets. If core PCE continues decelerating from 2.6%, September pricing (currently ~65bp of cuts) will likely hold; the intraday yield reversal reflects positioning squaring more than a structural shift. The real unmentioned risk is tomorrow's employment report validating cooling labor without recession signals, which could quickly re-anchor yields lower.
"Fiscal dominance and excessive Treasury supply are creating a structural floor for yields that disinflation alone cannot break."
Claude, you’re misreading the yield curve's resilience. It isn't just about inflation; it’s about the fiscal deficit and term premium. Even if PCE hits 2%, the Treasury’s relentless supply of long-dated bonds—needed to fund a 6% budget deficit—will keep the 10-year yield floor elevated. We are witnessing a structural shift where fiscal dominance overrides the Fed’s policy rate. Don't expect yield compression until the Treasury slows issuance, regardless of the PCE trajectory.
"Fiscal supply alone cannot explain today's intraday yield move; labor data tomorrow is the true pivot point."
Gemini's fiscal dominance thesis is underspecified. Yes, Treasury supply matters—but the 10-year yield at 4.345% already reflects ~2.5% real yield, which is historically elevated. If PCE genuinely decelerates to 2% and labor cools, the term premium compresses regardless of deficit size. The 6% fiscal deficit is structural; it doesn't explain why yields spiked 5.7bps *on in-line inflation data*. That's positioning, not fiscal inevitability. Tomorrow's jobs report will clarify whether this is a real repricing or noise.
"Fiscal deficits alone won't push yields lower; term premium and sticky services inflation keep real yields elevated, so yields may stay high unless disinflation accelerates and the Fed signals a pivot."
Gemini's fiscal-dominance thesis too cleanly assigns the 4.35% 10-year move to deficits. In reality, the yield floor is set by term premium and structurally sticky services inflation; the deficit story doesn't explain the 5.7bp intraday move on inline data. A credible path to lower yields would require faster disinflation and an open Fed pivot; otherwise, yields stay high and weigh on multiples, especially growth and duration trades.
Despite 'in-line' PCE data, the market's intraday reversal and yield curve's resilience suggest investors are pricing in 'higher for longer' rates, signaling a challenging environment for equities and growth names.
A potential opportunity exists in sector rotation into cyclicals like banks and networking stocks, hunting for idiosyncratic M&A alpha.
The 10-year yield near 4.35% implies a higher discount rate for cash flows, pressuring valuations, especially for growth names.