Wall Street is halfway there to seeing its first 5% pullback since early May. The narrative behind today’s stock market weakness is part triple witching, surging Treasury yields, COVID cases are rising again across some states, and concerns over how the economy will react to less stimulus and a potentially smaller-than-expected economic package.
The bond market selloff could see further momentum if technical selling continues. The 10-year Treasury yield tentatively rallied above the 100-day simple moving average. Investors are expecting Fed Chair Powell to set up a November taper and possibly some rate hike dots to move forward. While the steepening of the Treasury curve seems fairly supported domestically, risks across Asian markets could see a flight-to-safety keep demand strong for Treasuries.
The main event of the upcoming trading week is the FOMC policy decision. The two-day FOMC policy meeting will likely be a reiteration that they are poised to taper before the end of the year. Economists will fixate over the updated dot plot forecast to see if any members brought forward a rate hike into the end of 2022. Fed Chair Powell may provide hints that tapering won’t be quick, possibly indicating the Fed will not finish until next winter, which means rate hikes won’t happen until 2023. The economy appears to have survived the delta variant hit and the next couple of months of stabilizing economic releases will pave the way for a November taper announcement.
With monetary and fiscal stimulus starting to wane, clarity on the size of the next economic package and will enter a crucial phase. President Biden was unable to convince conservative democrats of a $3.5 trillion budget and talks will likely lead to a final price tag between $1.5 -2.0 trillion. Some traders will pay close attention to the upcoming tax increases and whether they are retroactive from earlier in the year or if they will be effective this September.
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