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Fed Meeting Aftermath: Equities Lower, Bond Yields Stable Despite Rate Hike Projections

Jun 17, 2021

By: Daniela Sabin Hathorn

KEY TALKING POINTS:

  • The Federal Reserve brings rate hike date forward as inflation becomes a focal point

  • Equities pullback intensifies but fundamental drivers still in place

  • Bond yields stabilize despite inflation expectations rising 

The hotly anticipated Fed day has come and gone, and markets have reacted widely as expected. It isn’t an easy job to convince market participants that all is well and good when faced with unemployment below target, inflation above target, and an equity market that is running hot, but the Fed seems to have found a balance that keeps everyone in check, at least for now.

Asset prices have come under some pressure after yesterday’s meeting, and that was maybe part of the Fed’s plan. We are now faced with a turn in expectations, not entirely out of the blue, but unnerving nonetheless as rising inflation becomes the center of attention once again despite the Fed showing indifference up until now. That said, a more hawkish Fed was bound to happen sometime soon as too avoid financial conditions being pushed too far before action was taken. 

The Dow Jones intensified its recent pullback yesterday afternoon hitting a one-month low just below 34,000. Equities had been surging in recent month despite inflationary pressures as investors we’re not concerned about the Fed trying to fight inflation anytime soon, which made them willing to pay higher prices to hedge against this unchecked inflation. But yesterday’s change in guidance may be seen as a turning point for stocks, which have been thought to be overbought for some time.

Fundamentally, there is still a good support for stocks as valuations move in line with improving economic conditions so I would expect the Dow to bounce back after its current pullback. Short-term support may arise around the 33,280 area although a further pullback may be seen towards 32,000.

Dow Jones Daily Chart

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In Europe, equities are following the bearish lead from the US, with the FTSE 100 taking the biggest hit after a few days of outperformance. The UK index attempted to break above the 7,200 mark for the first time since February last year but momentum quickly reversed as inflation concerns took over bullish sentiment. The current price is resting near short-term support (7,122) so we may see a renewed attempt to break higher if the FTSE can stay above this level. Alternatively, 7,042 is likely to be the next key area for sellers, followed by the psychological 7,000 mark.

FTSE 100 Daily Chart

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BOND YIELDS DOWNPLAY RATE HIKE PRESSURE

Given the attempted taper tantrum at the beginning of the year, one could argue that Powell has waited for the correct time to feed the rising inflation rhetoric to the markets, as bond prices were holding their ground on the back of the transitory argument despite hot readings in both CPI and PPI data.

The US 10-year yields holding steady around 1.55% after the announcement of two possible rate hikes in 2023, compared to 1.75% back in March when the Fed was consistently reiterating that no rate hikes were planned in the foreseeable future. The main difference is inflations expectations, which suggests that Powell has been successful in his attempt to adjust monetary policy without spooking investors, at least for now.

 

Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin


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