Stocks treaded water after a rally driven by the artificial-intelligence hype drove the market to its highest since August. Treasury yields fell on hopes the U.S. Congress will pass a debt deal to head off a default. 

The S&P 500 closed little changed, while remaining slightly above 4,200. Energy companies weighed on the index as oil sank below US$70 a barrel. The Nasdaq 100 extended this year’s surge to 31 per cent, with Nvidia Corp. hovering near US$1 trillion in value after announcing several AI-related products. A gauge of megacaps like Apple Inc. and Tesla Inc. climbed over 1.5 per cent.

“Yes, AI does have great potential and it does appear to be the ‘next big thing’,” wrote Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. “But I don’t see how that promise can offset the reality of higher interest rates and more pressure on the economy, at least not for a sustainable period.”

TREASURIES RALLY

U.S. bond yields slumped from the highest levels since March as investors evaluated the possible economic consequences of the holiday weekend accord to temporarily suspend the federal debt ceiling, and amid an expected wave of month-end-related buying.

Treasury rates on 3- to 10-year maturities led the move. The two-year yield, more sensitive than longer maturities to the outlook for Federal Reserve policy, traded near 4.5 per cent.

Stocks and bonds are sending opposite signals about whether U.S. inflation will abate on its own, according to billionaire Cliff Asness, who called the divergence his “biggest concern.” 

Unlike stocks, the bond market is telegraphing that the Federal Reserve will make aggressive interest-rate cuts over the next year or two, the co-founder of AQR Capital Management, said on an episode of “Bloomberg Wealth with David Rubenstein.”

'SCARY PLACE'

“If inflation stays sticky or it comes down because we enter a nontrivial recession —  it’s equities that I think are a scary place,” Asness said.

Fed Bank of Richmond President Thomas Barkin said he is looking for signs that demand is cooling to be convinced that U.S. inflation will ease.

Traders also kept an eye on the latest economic reports, with U.S. consumer confidence dropping to a six-month low as views about the labor market and the outlook for business conditions slipped ahead of a deal to raise the debt ceiling.

To Gina Bolvin, president of Bolvin Wealth Management Group, lower consumer confidence can be a bullish contrarian indicator. 

“With over US$5 trillion in cash on the sidelines, strong stock market momentum and debt ceiling drama closer to resolving, we think there is a good reason for stocks to perform well this year,” Bolvin said. “However, it may not be without volatility. The next market moving catalyst is this week’s jobs reports, which will influence the Fed.”

Key events this week:

• China manufacturing PMI, non-manufacturing PMI, Wednesday.
• U.S. job openings, Wednesday.
• Federal Reserve’s Beige Book, Wednesday.
• Fed’s Patrick Harker, Susan Collins and Michelle Bowman speak at events, Wednesday.
• China Caixin manufacturing PMI, Thursday.
• Eurozone HCOB Eurozone Manufacturing PMI, CPI, unemployment, Thursday.
• U.S. construction spending, initial jobless claims, ISM Manufacturing, Thursday.
• ECB President Christine Lagarde speaks at conference, Thursday.
• Fed’s Patrick Harker speaks at webinar, Thursday.
• U.S. unemployment, nonfarm payrolls, Friday.

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 rose 0.4 per cent
• The Dow Jones Industrial Average fell 0.2 per cent
• The MSCI World index fell 0.2 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.2 per cent to US$1.0730
• The British pound rose 0.4 per cent to US$1.2407
• The Japanese yen rose 0.5 per cent to 139.77 per dollar

Cryptocurrencies

• Bitcoin rose 0.6 per cent to US$27,852.97
• Ether rose 0.7 per cent to US$1,907.09

Bonds

• The yield on 10-year Treasuries declined 12 basis points to 3.68 per cent
• Germany’s 10-year yield declined nine basis points to 2.34 per cent
• Britain’s 10-year yield declined nine basis points to 4.25 per cent

Commodities

• West Texas Intermediate crude fell 4 per cent to US$69.77 a barrel
• Gold futures rose 0.8 per cent to US$1,978.20 an ounce