Displaying items by tag: fed
Markets are fretting over a variety of concerns: spreading delta variant, Chinese regulator crackdown, and Fed taper. However, Goldman Sachs says these risks are overblown, as delta variant will likely be less worrisome economically and their Fed forecast is dovish. They see a sharp turnaround for cyclical assets such as higher equities and higher bond yields in the short run. Near-term optimism will fuel US and Euro equities and most likely boost Japanese stocks as well. Going so far as to recommend shorting long-term euro bonds, and buying economically sensitive currencies like the Norwegian krone and South Korean won, which will appreciate relative to the dollar. This near-term cyclical rally won’t last long as they expect 2022 to deal from a different deck that won’t be as friendly to investors.
FINSUM: Weaker jobs growth will also delay the Fed’s taper, aiding in the cyclical rally.
The market was hit hard by bad economic data this week and yet markets barely budged. Consumer sentiment, Chicago Purchasing Managers Index, and Home Prices all swirled a whirlwind of bad news for markets and yet they hardly budged. This is because markets are convinced more than ever that bad news is good news because it will have the Fed kick the tapering can down the road. Powell made it clear that the new Fed environment will accommodate higher inflation and that while tapering might start this year, the Fed is a long way from rate hikes. This means growth-oriented interest rate-dependent stocks will do well as the Fed favors employment over inflation in its dual mandate.
FINSUM: Powell has all but confirmed a slow transition in monetary policy, don’t look for economic data to be the breaking point in your portfolio.
When you say bond legend, only one name likely comes to mind (let’s leave Gundlach out of this for a minute): Bill Gross. And old Bill always has an opinion, and this week it is a very strong one: “bonds are trash”. Bill says that bonds are now in the investment garbage can because Fed tapering in the first half of 2022 will likely cause a rise in Treasury yields from 1.3% now to 2% next year, causing an overall loss of around 3% over the next 12 months. According to Gross, “Cash has been trash for a long time but there are now new contenders for the investment garbage can. Intermediate to long-term bond funds are in that trash receptacle for sure”.
FINSUM: This is logically sound, but the timing is entirely dependent on the Fed.
The bond market is in an odd place right now. For the first part of the year, yields jumped on the threat of inflation. Then in the middle of Spring, those fears started to wane and yields started to fall. Other than a quick reversal of direction off a hot June inflation reading, that has been the trend all summer. However, the whole market looks very vulnerable to a change in sentiment. If inflation comes in warm again for July—especially coupled with some very good jobs numbers—the overall economic picture might move back to bullish, which could swing yields rapidly back in the direction they were headed in Q1.
FINSUM: Essentially this market could quickly realized it mispriced the direction of the economy, so there is a lot of risk for advisors and their clients. Nasdaq and Fidelity are having an interesting webinar on how to plan for this risk. Check it out here.
The market took a nosedive in the middle of the day today as investors were walloped with a hot CPI inflation reading. The CPI rose an eye-popping 5.4% in June, with core inflation coming in at 4.5%. The market was anticipating a flat 5.0% CPI number. Indexes turned downward immediately following the report. It should be noted than June 2020 was the nadir of the pandemic inflation readings, so that makes this report look even bigger.
FINSUM: The inflation boogeyman returns. Beware a big sell-off across the board in bonds, especially if the Fed or a member of the Fed makes any tightening comments.