All eyes will be on the Federal Reserve meeting next week as traders press the central bank to prevent a rise in bond yields.
But the U.S. central bank seems to be sticking to its messages that higher yields reflect the more cautious economic outlook, suggesting that the conflict between reactive bond traders and a patient central bank will continue. .
“The Fed is aiming for higher inflation which means higher interest rates. I think the market has misread the Fed in thinking about yield curve control, ”Steven Ricchiuto, chief U.S. economist for Mizuho, said in comments on a post- d.
The central bank’s reluctance to push back against bond market profitability has dampened investor sentiment, with the sharp rise in long-term bond yields this year causing an immediate panic across technology stocks, corporate bonds and emerging markets.
Some of these market nerves express concerns that a further chaotic increase in long-term output could hamper a recovering and severely declining economy, which is not prepared to deal with it. to increase loan costs.
US Treasury Department 10-year note yield TMUBMUSD10Y,
rose to around a year high of 1.63% at the weekend, The maturity rate of the benchmark is up about 70 basis points where it was trading at the beginning of 2021.
Meanwhile, the S&P 500 SPX,
and Dow DJIA,
they ended at another record on Friday, after recovering from last week ‘s recession when investors were caught up in the prospect of further selling in the bond market.
Analysts expect Fed Chairman Jerome Powell to reiterate the mantra that the central bank is still a long way from meeting employment and inflation targets at its press conference following the policy meeting on March 17 .
Perhaps more relevantly, the Fed is unlikely to meet calls from bond traders to announce tweaks to the Supplemental Leverage Ratio, which was amended last year to help banks deal with a coronavirus crisis, or to change the monthly purchases of US Treasurys. and mortgage bonds.
“They are going to resist being pushed around. The last thing they want to do is fight the market. as long as [the rise in yields] orderly and while credit markets are working well, the Fed is getting what it wanted, ”Gregory Staples, North America-based head of revenue at DWS, told MarketWatch.
See: Fed up dovish next week as Powell manages to calm Gary Cooper inside
However, one place where investors will see the central bank move closer to a bond market outlook of the economy is in the summary of economic forecasts and the so-called dot plot, where members of the Fed’s policy-making committee predict where policy interest rates are headed. .
The December dot plot shows that the majority of FOMC members are pencil in their first rate round in 2024.
With a $ 1.9 trillion incentive bill now signed into law by President Joe Biden, some senior Fed officials may choose the timeline they expect to move for the first time. a flat rate increase from the onset of the pandemic to 2023. But such a move is still a long way from off-market. more hawkish expectations, with short – term money markets penalizing in rate hikes as early as the end of 2022.
“It makes a difference to what the Fed is projecting and the markets are projecting,” Lauren Goodwin, economist and portfolio strategist at New York Life Investments, told MarketWatch.
But it is unclear whether this tightening is capable of directing further market turmoil in the way it has in the past few weeks, according to Jefferies’ Aneta Markowska.
She said bond market sales so far had reached levels that showed investors had already pulled economic momentum from the incentive bill. Until the Fed began the conversation about cutting down on asset purchases, it did not see yields move higher.
Ultimately, the heated debate on where interest rates are driven may be a side view for stock market investors who are currently blinded by the rise in long-term bond yields.
If the jump in bond yields reflects an increase in economic growth, corporate employment is likely to see a significant improvement, making higher borrowing costs equally relevant for the share market.
“You don’t need standards to stay at historical levels to improve employment,” Goodwin said.
Next week, investors will dig up some key U.S. economic data releases, including February retail sales and business output on Tuesday and February housing starts on Wednesday.
The corporate earnings reporting calendar will be sparse, although a handful of large companies may attract attention. Nike Inc. NKE,
Accenture PLC ACN,
and Fedex Corp FDX,
we will report the results next week.