A Dovish Fed Sent Equities Higher

Stocks rose sharply after Uncle Powell’s dovish stance during the FOMC conference. It was a relief day, as Fed officials still see about three rate cuts this year.

💰On top of the icing is the expectation that the central bank might also start to taper its quantitative tightening (QT) somewhat soon.

⏳The QT program started around mid-2022, which essentially let its securities holdings expire upon maturity at a pace of $65 billion in Treasuries and $35 billion in mortgage-backed securities monthly. Since then, the Fed’s balance sheet has shrunk by more than $1.5 trillion.

💵Reducing the pace of the balance runoff is something like a rate cut, as we discussed. It helps to ensure more liquidity in the market. It allows market conditions to be less stressful, especially at a time when Treasury bond yields are rising fast and hurting regional small banks’ performance.

🧰Persistently, labour data has been pricked by the Fed to delay monetary easing policy. We confirm that the Fed isn’t worried about a strong labour market. In Uncle Powell’s words, a strong hiring labour market should not be a reason to delay any rate cut. He does not see the higher wages driving inflation in current economic data. Indeed, for the past year, we have seen a resilient employment condition while inflation cools off. Therefore, healing the supply side in the labour market is a promising sign.

📪What’s on the menu today?🫕

At 9.45 pm, we have a string of data such as the S&P Global US Manufacturing PMI and Services PMI coupled with Existing Home Sales data.

We should expect the Fed Vice Chair to speak at 12 am and a 10-year TIPS auction at 1 am.

It is 21 March, 9 am in Singapore and 9 pm in New York. We have a strong equity market that keeps printing. As the music chair continues, we are still cautious and modestly tilt more to the long end.