Fed in focus, markets ignore retail sales, bitcoin consolidates

Bond yields stabilize, Nasdaq climbs

US stocks are mixed, with the Nasdaq leading the charge higher as bond yields stabilize.  The bond market will likely continue to push back on the Fed’s stance that despite the tremendous progress with the economic recovery, they are nowhere near ready to start thinking about changing their plans for interest rates and bond purchases.  The Fed has clearly signaled that inflation can overshoot and the traders might test the Fed’s patience by sending long end rates much higher.  The Fed won’t do anything major tomorrow, as they will wait until the 10-year Treasury might break beyond 2.0% and for financial conditions to deteriorate.  Talks about Operation Twist or Yield Curve Control (YCC) could be warranted during the summer, but right now the Fed needs to decide do they want to follow the ECB and push back a little over the recent rise in yields.

The Fed will deliver an improved growth outlook and if some policymakers eye a rate increase in 2023, that could help alleviate some bond market pressures.  Wall Street is expecting the Fed to slow asset purchases at the end of this year and for an interest rate hike at the November 2022 meeting.  No one doubts that the Fed will reaffirm their ultra-patient stance, but they need to show markets that they understand the improved outlook is driving long-term yields higher and that they are closer to acting if the bond market selloff deepens.

US Data

A wrath of US economic data painted a mixed picture, but in the end didn’t really matter.  Retail sales in February had a tough act to follow, since the January reading was revised higher, showing the impact of the December Trump stimulus checks.  The deep freeze hit the South last month was the primary reason advance retail sales posted a 3.0% decline, which was much worse than the -0.5% forecast.

Industrial production in February also took a big hit, but is widely expected to bounce back in March.

The NAHB housing market index was also impacted by extreme weather, but may have also confirmed that the peak of home buying is likely behind us.  The NAHB HMI fell 2 points to 82, a sign that rising interest rates and higher material prices are dragging builder confidence.  Demand is still healthy, but relentless housing market demand will continue to moderate.

The dollar is mixed today as Treasury breakeven rates continue to push higher.  The 30-year breakeven rate rose to 2.2385%, the highest level since 2014.  The greenback seems poised to consolidate until financial markets are beyond the Fed decision.

Bitcoin

Bitcoin is declining for a third consecutive day as liquidations appear to be growing at a fast pace for many short-term investors.   Glassnode co-founder noted yesterday that nearly USD500M in Bitcoin longs got liquidated after prices hit the all-time high.  Also adding that Long Term Holders (LTH) remain adamant about buying more BTC.

Bitcoin seems like it will consolidate a while longer, with tomorrow’s Fed decision likely being a short-term catalyst.

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