As expected, last week the Fed held the target Fed Funds Rate steady at the latest meeting. Important takeaways from the press conference include a continued patient approach on the part of the FOMC r...
As expected, last week the Fed held the target Fed Funds Rate steady at the latest meeting. Important takeaways from the press conference include a continued patient approach on the part of the FOMC regarding monetary policy decisions. Powell reintroduced the “transitory” narrative while acknowledging that inflation concerns have increased. I was not a fan of this thought process in 2021 when the Fed held tightly to this rhetoric for too long in the face of post-COVID inflation, but maybe this time, it's different. With the suggestion that stagflation may be on the horizon, with Chair Powell discussing increased inflation paired with a slowing economy, both the equity and bond markets unwittingly rallied for the afternoon. As the week wrapped up, however, equities sold off closing lower for the fifth consecutive week, but bonds remained within their recent trading range. The below chart highlights the change in the tenor of the Dot Plot between December and last week’s FOMC meeting. As indicated, the median result remains unchanged. However, individual FOMC projections drifted upwards with a greater number of calls for fewer hikes than was previously released.
It has become increasingly challenging to remain bearish on rates given the multitude of suggestions that data is more dovish, the Fed will have to more proactively spur economic growth and President Trump’s ongoing calls for lower rates. On a macro basis, however, I remain concerned that the inflation picture will fail to improve over the next several months and that the normalization (steepening) of the yield curve will limit any downward movement in rates as the Fed cannot cut rates as aggressively as they suggest. Though with less conviction, I continue to expect 10-year rates to move higher and revisit highs from earlier this year. Despite this, volatility will remain high, and we could test the 4% threshold before that expectation comes to fruition. Rates have been consolidating in recent trading sessions and remain barely above key support at around 4.15%. This level needs to be closely watched to see if rates will hold.
From the Trading Desk (with Contributions from Ryan Riffe)
The municipal market was quiet throughout the week as it took a breather from further deterioration. Although supply continues to pressure the market new issue deals had better traction compared to last week. Conversations with multiple clients confirmed the lighter flows in secondary trading resulted from a focus on the primary market at better levels as a more attractive alternative to fill inquiries. Additional comments continue to support duration extension trades locking in historically attractive yields as the upward-sloping municipal curve offers investors attractive levels on the long end. Robust supply, light reinvestment capital, rate volatility, and the ongoing tax policy concern will continue to make navigating this market a challenge. Ratios continue to get more attractive as we head closer to the April 15th tax deadline.
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.
Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses, and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees, and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.
© 2021 SWBC. All rights reserved. Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.
Let Us Know What You Thought about this Post.
Put your Comment Below.