US Close: Stocks slump, Treasury yields pop, Fed and DC in focus

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.

Fed

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.

DC

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.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Ed Moya

Ed Moya

Senior Market Analyst, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya