Good morning contrarians!
Stock futures are dropping a day after selling off. Tech stocks and small caps saw the worst of it yesterday, with the Nasdaq and Russell 2000 dropping 2.3% and 2.5%, respectively. S&P 500 gave up 1.3%.
As of 0630, tech is once again seeing the worst of it, with the Nasdaq down 1%. Futures on the other indexes are down a little less, about 0.6%.
Bonds are selling off but the yield curve has un-inverted again. Two-year yields are up about 5 basis points to 2.56% whilst the 10-year is up 7bps to 2.63%
Commodities are pretty flat, with WTI crude oil up 1.5% to trade around $103.50/barrel. Cryptos are down, with bitcoin off about 3% to trade around $45,000.
FOMC Meeting Minutes
Minutes from the Federal Open Market Committee, or FOMC, meeting in March publish at 1400 today. This should shed some more light on the debate the Fed is having about monetary policy. It’s mostly something for Fed nerds, though it is known to move markets.
We have been hearing some hawkish commentary from Fed officials lately, in fact it was comments by Fed Governor Lael Brainard yesterday that led to the selling. Brainard, thought to be more of a dove, said the Fed would start reducing its balance sheet as soon as next month and that “at a rapid pace.” Interest rate hikes, too, could come in more aggressive increments.
With the release of these minutes, we’ll find out if these public comments were consistent with the more private debate held (supposedly) behind closed doors. Signs of inconsistency could give investors reason to believe that all the hawkish talk from the Fed is exactly that — talk, or what Victorian Englishmen referred to as parlour game.
One would expect such information to lead to a relief rally. Or maybe the minutes will reveal even more hawkish commentary than was previously believed? That would presumably lead to selling of risk assets.
It’s certainly impressive how some well-timed comments from Fed officials can put the fear of God (or of something) back into investors. The amazing thing is this isn’t even about Fed policy per se. We’ve known for some time that the Fed will tighten interest rates and run off its balance sheet. It’s merely about the timing and severity of these moves.
Yellen Testimony
Another thing not watch today is testimony from Treasury Secretary Janet Yellen, before the House Committee on Financial Services. This is the ‘Annual Testimony of the Secretary of the Treasury,’ at 1000.
Yellen has been known to spook markets with her comments, though these too may be part of the aforementioned Parlour Game.
The Bottom Line
Right now the market seems to be taking the Fed’s word that it will be aggressive in hiking interest rates and unwinding the balance sheet. With this Powell-led Fed, which reversed course once before when markets went against it, that may leave some room for upside.
Or maybe not. Regardless of Fed statements, mortgage rates have increased dramatically and just yesterday crossed 5% for a 30-year fixed-rate mortgage. That type of thing will in time crimp demand for new homes. Once that happens it’s hard to see how the economy won’t contract. How long that whole process takes is of course open to debate.
For now, we’re looking at the second straight day of bonds and stocks selling off together. That type of thing rarely persists for very long. Eventually investors need to put money to work, whether that’s in safety of fixed income investments or the riskier area of equities. It may not happen today or even tomorrow, but hard to see how it can go much longer beyond that.
Fed Meeting Minutes: Daily Contrarian, April 6