• Markets await the Federal Reserve [2.30 pm EST]
• Dow Snaps 6-day winning streak (Boeing -6%)
• Nasdaq breaks 10,000 for the first time – led by Apple, Facebook
• China inflation data miss
• Havens rebound: 10YR yields retrace /USD/JPY < 108.

Inspiration

“The goal of a successful trader is to make the best trades. Money is secondary.” – Alexander Elder.

Opening Calls

S&P 500: 3,222 (+15 pts)

Dow Jones: 27,407 (+135 pts).

A lightly positive tone to European markets in early trading is not much to shout home about after steep losses Tuesday. Asian shares were flat after China’s inflation stats missed expectations. Futures point to a positive start on Wall Street after a previous mixed session that saw the Nasdaq break 10,000 for the first time while the Dow snapped its winning streak. Volatility will likely be subdued before the Fed meeting.

Market flip a blip?

The way markets finish today and potentially the course they take over the next few weeks could hinge heavily on today’s Fed meeting. There was a sudden flip from attack to defence on Tuesday (tech shares up, airlines down, Aussie down, yen up). The Fed could determine if that was a blip or a trend-change.

Awaiting the Fed

The Fed’s first set of forecasts since the pandemic will benchmark investor expectations for the speed of economic recovery. Markets have been flying on hopes of economic reopening. The continuation of price trends in airline and cruise shares, the Australian dollar, crude oil, and other growth-sensitive assets could be disrupted by what the Fed does and says.

What will they do? Potentially nothing except give forecasts and give their assessment of the current situation. The only risk is that the bond yield spike continues unabated (see chart)- and potentially dents the recovery with higher borrowing costs for firms and the US government, which have been borrowing heavily.

If the Fed wants to give a dovish signal, we suspect it will via its forward guidance.  Probably a combination of time and objective-based – holding rates down until 2022 and only lifting off at full employment and 2% inflation. Going straight into yield curve control would be aggressive and potentially even cause worry and confusion among investors. YCC may see markets questioning what the Fed knows that it doesn’t.

Chart: the US 10-Year Yield (3-months)

US 10-year bond yields have broken out to come just shy of 1%. Former resistance at 0.75% is now supported in the current pullback.

Kind Regards.