2-Year Yield Poised for Breakout, Eyes 5% Amid Economic Data

Week Begins with Equities Rally

The week starts with a rally in equities, buoyed by a lack of geopolitical tensions over the weekend. The U.S. 2-year yield is approaching 5%, just before updates on U.S. GDP and PCE. Notably, earnings from four major companies are expected this week.

Oil Prices Under Pressure

U.S. crude starts the week with downward pressure, trading near $81.50 per barrel. However, the $80 mark could serve as strong support, especially with potential geopolitical tensions in the Middle East.

A drop below this level might occur if expectations for rate cuts by the Federal Reserve diminish further, despite potential influences from higher oil prices and a strengthening U.S. dollar.

U.S. 2-Year Yield Surpasses 5%

Recent strong economic data and statements from Federal Reserve officials have dampened hopes for a mid-summer rate cut. The U.S. 2-year yield has been flirting with the 5% mark since early April and is expected to surpass it with the upcoming GDP and core PCE data releases. The U.S. economy is anticipated to have grown by 2.5% in the first quarter, with core PCE likely remaining steady month-over-month and showing a decrease year-over-year.

Impact of Economic Growth and Inflation

If the economic growth continues without spurring inflation, it could be beneficial. However, persistent high inflation would necessitate a more aggressive monetary policy by the Fed to temper economic activity and potentially induce a recession.

The interplay between growth and inflation will be crucial for investors assessing the timing of the Fed’s next moves. Currently, there’s over a 50% likelihood of a rate cut in September, though the proximity to the November elections might push this adjustment to later in the year.

Focus on the ‘Magnificent 7’

Despite a decoupling from yield and Federal Reserve expectations, the S&P 500 and Nasdaq have seen notable gains, partly driven by optimism in tech stocks. However, recent earnings from key semiconductor companies were underwhelming, despite positive outlooks due to AI growth.

This week, earnings from Microsoft, Google, Meta, and Tesla will be closely watched. Their performance could significantly influence the broader market, especially with the S&P 500 expected to show a 4% decline in Q1 earnings, in stark contrast to the stronger performance expected from these tech giants.

Overall Market Outlook

With the anticipation around these tech giants, their outcomes could set the direction for the S&P 500. The market’s focus will remain on how these companies perform, with substantial influence expected from just a handful of stocks.