US close: stock collapse, higher Treasury yields, focus on the Fed and DCs
Wall Street is at the midpoint of its first 5% decline since early May. The narrative behind today’s stock market weakness is part of a triple witchcraft, surging Treasury yields, COVID cases on the rise again in some states, and concerns about how the economy will respond to less stimulus and a potentially smaller-than-expected economic package.
The bond market liquidation could gain further momentum if the technical sell-off continues. The 10-year Treasury yield temporarily rose above the 100-day simple moving average. Investors expect Fed Chairman Powell to put in place a cut in November and maybe a few percentage points of rate hikes to move forward. While the steepening of the Treasury curve looks fairly sustained domestically, risks in Asian markets could see a flight to safety keeping demand for Treasuries strong.
The main event in the coming negotiating week is the political decision of the FOMC. The two-day FOMC political meeting will likely be a reiteration that they are on the verge of shrinking before the end of the year. Economists will focus on the updated dot plot forecast to see if any members have advanced a rate hike through the end of 2022. Fed Chairman Powell could give clues that the cut will not be not fast, possibly indicating that the Fed won’t finish until next winter, meaning the rate hikes won’t happen until 2023. The economy appears to have survived the delta variant and the next two months of Stabilizing economic publications will pave the way for a reduction announcement in November.
With monetary and fiscal stimulus starting to weaken, clarity on the size of the next economic package and will enter a crucial phase. President Biden has been unable to convince conservative Democrats of a $ 3.5 trillion budget and the talks will likely lead to a final price of between $ 1.5 billion and $ 2.0 billion. Some traders will pay close attention to upcoming tax increases and determine if they are retroactive to the start of the year or if they go into effect in September.
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