Thursday, June 17, 2021
Top Story
A Moderately Interesting Fed Meeting
- The Federal Reserve (Fed) ended its two-day Federal Open Market Committee (FOMC) meeting yesterday and, as expected, there were no changes to current interest rate or bond purchasing policies.
- However, signaling on future path of short-term interest rates seemingly surprised markets. Notably, the number of Fed members that now expect interest rate hikes in 2023 changed dramatically.
- While an initial hike was once thought of as a 2024 event at the earliest, the majority of members now expect at least two quarter-point interest rate hikes to take place in 2023.
- The overall hawkish message surprised the bond market and Treasury yields across the curve moved sharply higher after the FOMC statement was released.
- For more on the key takeaways from the most recent Fed meeting, see today’s LPL Research blog, available at 12:00 p.m. ET.
Daily Insights
U.S. equities point to a lower open following Wednesday’s selloff
- All major U.S. markets are lower amid Wednesday’s Fed outlook signaling earlier than expected rate hikes.
- European markets are lower following yesterday’s U.S. markets results, putting the nine-day win streak for the pan-European STOXX 600 in jeopardy.
- Asian markets mixed with Japan (Nikkei) down almost 1% despite optimism from Japan’s manufacturers per the most recent Tankan poll.
Initial claims unexpectedly rise back above 400k
- Initial filings for unemployment benefits rose for the first time since April, coming in at 412k for the week ending June 12 and well above economists’ expectations for a further decline to 360k.
- Continuing claims data also disappointed, but was flat compared to the revised prior week, which was the lowest since March 2020.
- Eight states are ending extra benefits this week and California fully reopened its economy Tuesday, which should help future numbers reestablish the downward trend.
Bipartisan infrastructure deal still alive
- Odds of a bipartisan deal have increased after 11 Republican Senators reportedly signed off on the latest proposal of roughly $600 billion in new spending.
- We still consider a bipartisan agreement unlikely given the difficulty of getting all Democratic Senators on board.
- Some Democratic Senators are concerned the plan doesn’t go far enough, or that it may impede their ability to get all of their priorities through Congress later this year under reconciliation.
- More than 2 trillion dollars in infrastructure and social spending, partially paid for by tax increases starting in 2022, remains our base case.
Biggest earnings gains in 2021 still expected to come from outside the United States
- S&P 500 Index earnings are expected to grow by a very strong 35% in 2021, up from 18% expected on January 1.
- However, developed international looks even a bit better, with 38% earnings growth expected for the MSCI EAFE Index this year, up from 19% expected at the start of the year.
- The upward revision to the consensus earnings growth estimate for emerging markets, based on the MSCI Emerging Markets (EM) Index, has been a bit smaller but still strong at 16 percentage points, but EM earnings are expected to increase a whopping 43%.
- Our regional tactical views are aligned across the board, but we wouldn’t be surprised if developed international markets outperformed in the second half based on the strong earnings rebound we expect and our preference for value.
Technical update
Stocks sold off broadly following the Federal Open Market Committee (FOMC) statement and meeting, but defensive bond proxy sectors lagged the most as interest rates rose across the broad. The 2-year yield broke above resistance at 0.19% and hit its highest level in more than a year, while the 10-year yield bounced decisively off support and closed 7 bps higher at 1.57%. Banks benefitted from the moves, as the KBW Bank Index gained 0.5%.
LPL Research in the Media
LPL Research Chief Market Strategist Ryan Detrick joined CNBC’s Squawk Box with Michael Santoli yesterday to discuss current market trends. You can watch the full interview here.
Sustainable Investing Becoming Mainstream in Fixed Income
Sustainable investing is becoming more mainstream in fixed income markets and companies that recognize that changing dynamic may be able to avoid financially material impacts. Learn more in this week’s Weekly Market Commentary.
New Highs in Inflation and Stocks
On this week’s LPL Market Signals Podcast, LPL Research looks at the better than expected market highs, inflation concerns, and sustainable investing in the fixed-income market.
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