STOCK MARKETS GO DOWN AFTER FED MINUTES
Stocks careened into the red on Wednesday after the release of surprisingly hawkish Federal Reserve meeting minutes. It was a dramatic turnabout, as stocks initially moved higher following the release of the minutes, as investors (and algorithmic trading systems) focused on the few hints of dovishness sprinkled in the document.
But an actual read of the minutes shows growing confidence in the path of economic growth and inflation — setting the stage for a potential acceleration in the pace of the Fed’s tightening campaign. The result was a 500-point reversal in the DJIA from its high and an apparent failed test of the 50-day moving average that sets up a possible test of the panic lows seen earlier this month.
In the end, the Dow Jones lost 0.7%, the S&P 500 lost 0.6%, the Nasdaq Composite lost 0.2% and the Russell 2000 bucked the trend to gain 0.4%. Crude oil gained a touch, gold fell and Treasury bonds were hit hard, pushing the 10-year yield to 2.94% — closing in on the 3% threshold that hasn’t been crossed in seven years.
The meltup in the 10-year period is getting serious now, nearing the 3% to 3.5% zone that many professionals have fingered as the danger zone where pricier credit will weigh on stock prices via everything from a pullback in corporate debt-funded share buybacks to weighing on consumer financing and spending.
The spin from traders concerning the Fed minutes evolved rapidly during the day, as folks realized that the initial dovish take was misguided for a few reasons.
For one, it came before employment, CPI and PPI reports for January showed ongoing labor market tightening, wage growth and evidence that inflation is heating up. It also came before a very inflationary and stimulative budget deal in Congress that is expected to push the annual deficit past the $1 trillion threshold soon. I expect the market to move lower here to test its recent lows and pressure new Fed chairman Jerome Powell — which will make his first appearance before Congress in his current role on Feb. 28 — to walk back what looks like increasing hawkishness from the central bank. If he doesn’t, the losses will deepen as interest rates quicken their rise and bond prices quicken their declines. The “Goldilocks” era of good growth, low rates, low inflation and an intractable rise in stock and bond prices is officially over.