One of the most anticipated Federal Reserve decision days since the depths of last year’s pandemic-induced market chaos has finally arrived.
Deutsche Bank chief macro strategist Alan Ruskin offered a couple of tables in a note Tuesday summarizing how the S&P 500 SPX,
Treasury yields: TMUBMUSD02Y at 2 years,
and TMUBMUSD10Y at 10 years,
– and the dollar has responded to previous Fed decisions, including several emergency measures last March, dating back to September 2019 (see below).
Deutsche Bank
Deutsche Bank
Context and expectations are crucial to how the market responds to Fed action or inaction, of course. Several of the chart’s dates correspond to the Fed’s own reaction to turns in credit markets that sent shockwaves through the financial system.
But with the forecast that the Fed won’t make changes in interest rates or asset purchases, it’s interesting, but it’s probably not surprising to see that the S&P 500 tends to show little reaction on days when the central bank s estimates, increasing by an average of 0.17%. The following week, the index rose an average of 1.41%.
Read: What would cause the Fed to make a change of direction? Tip: Much more than some high inflation readings
Meanwhile, Treasury yields have tended to decline, which would likely be a welcome development for the Fed.
See: Powell will be “indifferent” to the rise in bond yields
A renewed bond sale boosted yields on Wednesday, with a ten-year rate rising to a 14-month high above 1.67%. A higher pace for yields over the past six weeks, which initially annoyed stock market investors, fearing rising inflation expectations that the Fed would begin to dampen monetary policy support earlier than expected, despite the security that the central bank intends the economy to expand and keep up the pressure until inflation exceeds its 2% target.
Rising yields on Wednesday produced renewed pressure on the Nasdaq Composite COMP
which fell 1.2%, while the DOW Jones Industrial Average DJIA,
traded almost unchanged and the S&P 500 was down 0.6%. The Dow and S&P 500 are trading not far from Monday’s record highs.
The Fed is likely to have a hard job ahead of it to try to assure the market that it will not be baffled by rising yields. Ruskin said market participants are likely to believe that if the Fed does not pivot now, it will change soon.
“These are the expectations that suggest that any relief Powell provides against higher bond yields will be short-lived,” he wrote. “This also means that Powell resists little to higher yields, because those yields are still historically low; they reflect the most desired inflation and growth expectations; and, so far, they have been hailed as benign for risky assets, which have the strongest growth in at least seven decades to come. “