Displaying items by tag: fed

(New York)

Another jobs report hit the tape today, and another good reading, with job growth outpacing expectations. Crucially, there were also no signs of heavy wage growth that could stoke the market’s inflation fears. According, Treasury yields fell across the board, with the short end of the curve falling the most. Analysts feel that the report did not bring the dreaded Fed Taper any closer, which led to the fall in yields. Fed minutes will be released next week and that is the next time the market will get a peek into what the central bank may do next.

FINSUM: Two divergent paths here—either the market is falling into complacency, or the Fed’s view that inflation is “transitory” is starting to come true. It might only take an errant sentence form the Fed to spark a big correction.

(New York)

According to a poll of leading bond strategists surveyed by Reuters, there is likely to be a correction in bond markets in the next three months. The reason why is that central banks across the world are all looking for the exits from their stimulus programs. The head of strategy at Rabobank commented that “The message from Powell is: We will look through it (inflation). We're not going to jump to conclusions and that creates some calm. But you just need a couple of big surprises (in data) and things are again open to correction”. 59% of those strategists surveyed said they saw a “significant” sell-off in global bond markets coming in the next three months.

FINSUM: This all depends on timing and signaling. If the Fed makes an inadvertently hawkish statement, you could easily see a 2013-style Taper Tantrum. But if the Fed uses careful wording and guidance, the whole transition could be smooth.

(New York)

The market has been nervous for months about growing inflation in the US. The Fed has tried to appear sanguine about it, and has so far done a decent job of keeping fears in check. However, a blowout inflation report this month, as well as more hawkish comments this week, means that anxiety is rising strongly again. And according to Jeffrey Gundlach, the fears are justified as he believes inflation will not be “transitory” as central bankers have been predicting. One of his core arguments is that inflation may become a self-fulfilling prophecy, where consumers start stocking up on items now to avoid future price rises, which in turn causes shortages and drives prices higher.

FINSUM: The self-fulfilling prophecy is a good near-term argument, but we have a longer-term one: demographics. The largest generation in the history of the US—Millennials—are coming into their peak earning and buying years, which is creating demand for literally everything, and supply is tight across almost all industries. Inflation looks inevitable.

(New York)

Yields did something very alarming today: they shot up to their highest level in two weeks as a kick-off to summer trading. Yield rises were the epicenter of all the volatility a couple of months ago, and have been the key driver of stock returns as they are the primary asset for pricing inflation risk. So the big question is where will they go from here?

FINSUM: Inflation fears have calmed, but commodities prices are still keeping those worries alive. The Fed seems to hold the key to the whole issue. As long as it walks the line that inflation is transitory, and data at least marginally backs that up, the market will be fine. But if we get a couple suspect reports, and a bad headline or two, all exacerbated by an off-the-cuff Fed remark, we could easily stumble into a correction.

(New York)

May 12th was one of the key market moments of 2021. All eyes were on new inflation data that would make or break the market. The result was a definitive “break”. Inflation came in hot, with the reading measuring 4.2%, well over already high expectations of 3.6%. Markets took a pounding, with the Nasdaq leading the day’s losses in a 2.7% fall. The Dow and the S&P 500 also fell sharply.

FINSUM: We are now in the middle of another market tantrum. It is critical to ask oneself why inflation is so troubling. The reason the market is losing is because of higher rates’ effect on tech stock valuations, but even more importantly, the timeline for the Fed’s taper. But if you can put that aside, what is actually happening is that economy is doing well, and earnings look likely to be great. We think investors should just ride out the storm.