What Does the Fed Say? | Daily Market Update

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Tuesday, June 22, 2021

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What Does The Fed Say?

On this week’s LPL Market Signals podcast, LPL Research discusses why a more hawkish Federal Reserve shouldn’t have been much of a surprise, the sharp earnings revisions higher, and reasons for downgraded technology.

Daily Insights

U.S. markets open higher following Monday’s market rally

  • At the open the S&P 500 Index is less than 1% from its June 14 all-time high.
  • European equities are mostly higher as the European Central Bank (ECB) provides an optimistic recovery outlook for the region.
  • Asian equities were mostly higher with Japan (Nikkei) rebounding from its previous trading session amid shipping delays and supply constraints in south China.

Post-meeting “Fed speak” really begins today with Fed Chair Jerome Powell’s testimony before Congress

The market response to June 16’s Federal Reserve (Fed) policy meeting certainly impacted markets, but the response was likely more about the added policy uncertainty than the shift in views.

  • Several Fed speakers tried to reassure markets Monday, contributing to equity markets bouncing back and the reflation trade seeing a modest comeback.
  • Powell’s comments, however, carry the most weight and we’ll hear plenty from him today during scheduled testimony before Congress.
  • Powell’s pre-released comments stuck to the script that current inflationary pressures are transitory, but markets will also be watching comments on the growth outlook, which can be a secondary signal on inflation expectations.

Connecting the Dots on the Recent Bond Market Price Action

Markets, always on the look-out for hints on Fed policy, have interpreted the recent dot plot release as a hawkish shift in policy. Consequently, fixed income and equity markets reacted sharply to the news.

  • We think the sell-off in bonds on the front end of the curve is likely the right interpretation of shifting Fed policy whereas we don’t think investors should read too much into the big rally in bonds on the long end of the curve.
  • The exaggerated move lower in longer-term yields was likely from a popular trade on higher long-term Treasury yields unwinding into a Treasury market with more sellers than buyers.
  • These dot plots have often added confusion and volatility to markets, yet another reason the Fed tries to downplay the importance of these releases.
  • For more on our interpretation of how the bond market reacted last week to the dot plots, please see today’s LPL Research Blog.

Technical update

Value stocks led a broad-based advance Monday, with the Russell 1000 Value Index outperforming Growth by more than 1%, the most since May 10. Advancers outnumbered decliners by more than 5.5:1 on the New York Stock Exchange (NYSE), the best reading in more than a month. Markets are steady in early trading, but first tactical support for the S&P 500 Index can be found near 4164.

Inflation And What the Fed Is Saying

Inflation seems to be on the rise, but LPL Research believes there are good reasons to think it will be transitory. Learn more in this week’s Weekly Market Commentary.

 

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