US stocks bounced back as investors were forced back into risky assets after the bond market rally sent Treasury yields sharply lower. The 10-year Treasury yield tentatively fell below 1.30%, before stabilizing around 1.315%. The Fed’s minutes weren’t as hawkish as the FOMC decision a few weeks ago and news that China is considering a RRR cut provided enough reason for investors to buy stocks.
The Fed’s minutes showed that a taper announcement still seems poised for the August/September time frame. The Fed has already pointed out they are a little nervous about inflation, and the minutes confirmed that fear. The Fed will continue to watch the economy and still require significant improvement in the labor market for them to reach their maximum employment goal.
The Minutes stated, “Several participants saw benefits to reducing the pace of (MBS) purchases more quickly or earlier than Treasury purchases in light of valuation pressures in housing markets.”
The Fed is nervous about the housing market as they pointed out that “low interest rates were contributing to elevated house prices and that valuation pressures in housing markets might pose financial stability risks.” Given the concerns with the housing market, Wall Street is convinced the Fed will taper MBS first.
The Minutes had some dovish bits and clearly ruled out any taper announcements in July. If the next couple of months of data does not support reaching substantial progress in the labor market recovery, they may have to wait till beyond the Jackson Hole Symposium. The debate is heating up as some policymakers saw the economic data as providing a less clear signal about the underlying economic momentum. The Fed is clearly in wait-and-see mode on continued improvement with the labor market and how fast inflationary pressures will dissipate.
Given how hawkish the FOMC decision was in June, these Minutes were a small step backwards. The debate at the FOMC will intensify going forward and market participants will closely follow Fed speak to see if any voting doves provide hawkish hints.
Treasury yields remained heavy and the dollar gave up earlier gains.
The ECB’s heavily anticipated strategy review is finally here. The review started shortly after ECB Lagarde took over in November 2019 and was delayed due to the pandemic. On Thursday, the ECB will unveil its new framework that is expected to show a slight change on how it defines price stability and a more aggressive approach to supporting the economy during the next crisis. The ECB will tweak its inflation target to 2% from below, but close to 2%. The framework should provide clear guidelines to support employment and climate change initiatives. No new instruments are expected to be added to the ECB’s toolbox.
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