The Market Today

10-Year Yield Drops to 1.35% Overnight after Fed Pivot

by Craig Dismuke, Dudley Carter


The Chicago Fed National Activity Index rose from -0.09 to +0.29 in May. The CFNAI is an aggregation of 85 different economic indicators designed to be an indicator of changes in the overall economic landscape.  For example, when the CFNAI’s three-month average is above +0.70 following an expansion, a period of more rapid inflation is expected to occur.  The 3-month average for the CFNAI is now up to 0.81.

Fedspeak: St. Louis Fed Bank President Bullard (8:45 a.m. CT) is scheduled to speak again today along with New York Bank President Williams (2:00 p.m.). The New York Bank President is a voter every year while Bullard will be a voting member in 2022.   



U.S. Equities and Treasury Yields Recover from Early, Steep Declines in Asia as Markets Continue to Digest Fed’s New Tone and Forecast: After a wobbly start in Asian trading, U.S. equity futures are in the green and the 10-year Treasury yield was unchanged just before 7 a.m. CT. S&P 500 futures bottomed early in overnight trading at down more than 0.6% as Japan’s Nikkei dumped more than 3% to lead widespread losses across Asia. Markets there had closed Friday before Fed President Bullard stoked volatility across European and U.S. markets with hawkish confirmation of the shifting Fed outlook displayed in the central bank’s latest projections released last Wednesday (more below). Market sentiment has stabilized somewhat, however, since Asian markets closed and Europe’s trading day began. The Stoxx Europe 600 opened 0.9% lower but was positive by 0.3% just past the session’s halfway point. S&P 500 futures had recovered to trade 0.4% higher heading into the U.S. session. The Dow was leading gains among major index futures at 7:15 a.m. CT, recovering 0.6% from its worst weekly loss since October. The 10-year Treasury yield tumbled as equities bottomed, pushing the 10-year yield down as many as 8 bps to 1.353%, its lowest intraday level since February. The benchmark yield, however, recoiled higher and was up 1.8 bps to 1.457% at 7:20 am. CT. The 2-year yield had risen 1.0 bp to 0.264%, a new high back to March 2020.



ICYMI – June 18, 2021 Weekly Market Recap: Not unexpected, markets became particularly volatile in the second half of the week as surprises from the Fed’s decision awakened nearly-moribund markets. Investors largely shrugged off mixed economic data on Monday and Tuesday. Retail sales showed some loss of momentum in May, but spending levels surpassed expectations as April and March were revised strongly higher. A couple of housing reports showed higher prices remained a headwind to activity. And Producer Price inflation jumped more strongly than expected in May, highlighting why investors were so anxious about the Fed’s decision. The Fed’s statement was notable both for what it said – that vaccinations had turned the tide on the U.S. pandemic and brightened the outlook – and for what it didn’t say – there was no acknowledgement of the slowdown in hiring. However, the market-moving information was in the updated projections. The projected path for fed funds was raised as the median official now projected two rate hikes in 2023, up from none in the March forecasts. On Friday, St. Louis Fed President Bullard said the Fed was justified in “tilt[ing] a little bit more hawkish…to contain inflation pressures,” noting the pace of recovery and inflation had both surprised to the high side of December forecasts. To that point, the forecast for growth (6.5% to 7.0%) and core inflation (2.2% to 3.0%) for 2021 were revised higher. In addition, Fed Chair Powell said officials had begun the discussion around tapering asset purchases and would continue those talks at upcoming meetings. While the initial market reaction was for a steepening sell-off across the Treasury curve, the tone quickly reversed as investors reassessed the implications to inflation risks of a faster lift-off from a more responsive Fed. The curve flattened sharply on Friday, with the 2-year yield pushing up another 4.5 bps to 0.25%, the highest level since April 2020, while the 10-year yield fell 6.6 bp to 1.45%, near its lowest level since March. For the week, the 2-year yield rose 10.7 bps while the 10-year yield ended essentially 1.4 bps lower. Market-based inflation expectations for the next 10-year period fell 10.1 bps to 2.24%, the lowest in over three months. Click here to view the full recap.

Businesses Lobbying for Another Aid Package: Per a Politico report this morning, “The growing list of trade associations lobbying for a new round of pandemic aid — also representing gyms, amusement parks, travel agents and horse shows — say they suffered massive, unrecoverable financial losses because of social distancing restrictions and still face uncertainties as the economy recovers.”

CORONAVIRUS UPDATE  Vining Sparks Coronavirus Chartbook

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