Fed Path Clarity
Macro Perspectives: Tue 23 Nov 21
Few things will create more uncertainty in markets than uncertainty surrounding the path of monetary policy - especially, when its related to "who will lead Fed policymaking."
With that, there was strange price action across markets last week, as there was a growing view that we might be in for a change in Fed leadership. Markets started pricing in the prospects of a Fed that would be "easier for longer" (maybe forever), with the idea that a Brainard-led Fed would make the White House agenda an input in Fed policy making.
With the goal of stability in mind, there was good news yesterday morning (U.S. time). Before the market opened, the financial media was tipped off that Biden would re-nominate Jerome Powell.
What does it mean for markets?
It means the Fed policy that has been telegraphed (tapering asset purchases with prospects for a June liftoff in rates) remains on path.
That should remove the lid on the interest rate market, which has been suppressed, given the economic and rate picture. The 10-year yield traded up to 1.63%, and now we may see rates move higher, to test of the highs of the year (perhaps before year end).
What suffers when we get a confirming event (the Fed renomination) of a new tightening cycle for interest rates?
Growth stocks - particularly, the much-loved big tech stocks.
No coincidence, the Nasdaq was among the worst performers on the day. Moreover, the decline on the day produced a technical reversal signal (an outside day).
This will be the spot to watch this week. Will the air come out of the Nasdaq into the end of the year? Conversely, what benefits from rising rates, into a recovering economy? Small caps and value stocks.
Trade Idea: $IJR & $IWD to diverge from $IWF.
