Markets took a Hit

Yet another roller coaster rides for investors and traders as markets sold off soon after the release of the FOMC minutes. The Dow Jones Industrial Average took the lead and fell by 1.1%, while the S&P 500 followed suit. Nasdaq wasn’t spared with a decline of 0.9%. Russell 2000 also pared early gains and rushed for the bottom.

The sell-off was broad-based, which hints at how market participants are concerned about the Fed’s support on the market. With the invisible hand of the Fed moving off, this is a strong clue on the subsequent performance of the equity market unless Uncle Powell assures a slower pace of tapering.

FOMC Minutes Essence

It was a clear message: Fed governors have been hinting that the onset of tapering is coming in recent weeks. The minutes confirmed this notion. As the economy has recovered swiftly, the Fed is now removing the lifeline support that seems not so appropriate in the current economic progress.

The question is now, when will it begin. Most analysts expect it to be around September or December despite many eyes on the Jackson Hole meeting.

The Bond Market is not Reacting

In the first instance, Pika World reviews the bond market movement, and it was pretty muted. Strange as some would describe, since the 10-year Treasury yield closed at around 1.27%, a level lingered for most of the session. The 2-year yield ended at 0.21%, lower than the 0.22% it hit early in the trading day. This also seems awkward given that the short term interest rate tends to move higher when there is any sign that the Fed is pushing the short term interest rate higher and sooner.

However, this need not be so given that there is nothing new in the information, and analysts would have expected this coming given many Fed members speaking out loud on tapering prospects. Therefore, the consensus for short term interest rate hikes for 2022 and 2023 remains intact.

Delta Variant on the US economy

According to Fed President Bullard, the Delta Variant would have little impact on the US economy. This is because businesses and households have primarily adapted to the response of the pandemic. This means companies have found their contingency plan on producing their goods while households have found ways to continue their consumption of other goods and services.

Consistent with his prior outlook, he believed that the US economy had made “substantial” progress, often seen as a benchmark for the Fed to pare down the $120 billion a month on asset purchase.
His thoughts seem relevant as Pika World had discussed that if the Fed is to go slower in tapering, there is a stark risk that the pace has to shift to a higher gear to tame the inflation.

What’s on the Menu Today?

The week of important data continues.

At 8.30 pm, the important Philadelphia Fed Manufacturing Index for August will be released. We expect to reach 23.0, a rise from 21.9 from the prior period. However, a lacklustre reading will point downward risk to the economic pace of recovery.

The Initial Jobless Claims data will also be out at the same time. Again, we expect moderation to 363K from 375K as the labour market heals further with the robust footing of the US economy.