US stocks didn’t know how to react to the Fed’s minutes. Stocks initially tumbled as most participants’ substantial progress will be made at some point this year, but losses were short-lived as tapering does not necessarily mean you set the clock for rate hikes.
The S&P 500 index declined for a second consecutive day as strong results from US retailers is not enough to keep risk appetite going as Wall Street is starting to see a much more normal outlook.
Fed remains in wait-and-see-mode
The Fed’s Minutes clearly showed a consensus over hitting their inflation goal and a split over when to start tapering its asset purchases. The Fed remains in wait-and-see mode as the Delta variant may temporarily delay the full reopening of the economy and restrain hiring and labor supply.
The minutes reinforced the view by some policymakers that a tapering decision is not linked to rate-hike timing. It looks like the Fed made up their mind over having a proportional tapering over mortgage-backed securities and Treasuries. The housing market remains hot and this will likely draw some scrutiny over not accelerating the reduction in MBS.
The Fed isn’t any closer to formally announcing the reduction of their extraordinary support. Fed tapering is clearly in training camp mode, with Jackson Hole likely being a preseason game, and either the September or most likely the November FOMC meeting being the time to announce how they will pull back stimulus.
The housing market peak seems to be setting in as mortgage applications are falling and housing starts dropped to a three-month low. Housing demand may be slowing as the increase in building permits is for multi-family developments. The housing market is still strong, but the data seems poised to normalize going forward.
The dollar turned positive after strong demand for the 20-year bond auction. The bidding was solid as the bid-to-cover ratio came in higher at 2.44x. The 10-year Treasury yield rose as much as 3 basis points but failed to test the 1.30%.
Yields stumbled and the dollar pared gains after the Fed’s minutes remained neutral, disappointing some traders looking for clearer taper signals.
Crude prices extended losses after gasoline stockpiles unexpectedly rose, marking the end of peak summer driving season. The weekly EIA report was a mixed bag as the headline draw of 3.2 million barrels was larger than expected, gasoline demand weakened, jet fuel improved slightly, and production rose to 11.4 million bpd.
There are still too many question marks over the crude demand outlook over the next few months and that will weigh on crude prices. The return to the office no longer seems like a certainty and delays in approving vaccines for younger children will likely mean inconsistent demand as the school year starts.
After the release of the Fed’s minutes, risk aversion prevailed and oil prices returned back to session lows.
Bitcoin is rallying as Asia continues to embrace cryptocurrency adoption, despite the mass exodus from China. The Chainalysis 2021 Global Crypto Adoption Index showed global adoption increased by over 880% in the last year. Vietnam, India and Pakistan are the leaders in crypto usage, while the US drops two spots to 8th.
Endorsements from Jack Dorsey and his bitcoin mining efforts are also very positive for the crypto space. The NFT world is starting to buzz again and that should be somewhat supportive for Ethereum.
Bitcoin is consolidating between the USD 45,000 and USD 48,000 trading range but could be poised for one last rush towards the USD 50,000 level if the Treasury yield curve does not steepen too quickly.
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