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Powell & Volatility

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On Wednesday, 16th June, 2021, Fed Chairman, Jerome Powell, said at a press conference after their 2-day meeting, that officials would begin a discussion of scaling back bond purchases used to support financial markets and the economy during the pandemic.

Powell added, “You can think of this meeting as the talking-about-talking-about meeting, if you like.”

This was kind of expected.

Instead, what came as a surprise to the market was the forecast that showed an anticipation of 2 rate hikes in 2023, which was sooner than many had predicted. However, Powell did say that one should take it with a pinch of salt – meaning that these predicted hikes are not cast in stone.

The drastic change in the rate hike forecast served as the catalyst for the volatility in the markets we experienced – incidences that followed the press conference.

Adding on to the volatility is a statement from St. Louis Federal Reserve President, James Bullard, who is known to be a dove on policy. In an interview with CNBC on Friday, 18th June, 2021, Bullard sees rates rising in late 2022 – a timeline that is earlier than what was announced in Powell’s statement 2 days ago.

Below are the closing levels on Friday: –
Dow Jones 33290.08 -533.37 -1.58%
S&P 500 4166.45 -55.41 -1.31%
Nasdaq Comp 14030.38 -130.97 -0.92%
US 10Y 1.443%
VIX 20.7 +16.62%

The US 10Y moved from a high of around 1.59% after Powell’s comments, to close below 1.5% at 1.443%. This suggests that the earlier than expected rate hike predictions are going to affect long-term growth prospects.

The market had priced in continued growth for the next few years. However, if the feds were to bring forward the hikes, the expected growth path needs to be adjusted down.

It has been best expressed in the flattening of the yield curve.
Stock markets took their cue from this and sold off.

Perhaps the yield curve steepening trade was over crowded. At the same time, massive unwinds were the cause of the big flattening we saw. Or maybe, it is suggesting growth will slow down sometime in the future. The following days of market moves, should tell us which is the case.

In the meantime, looking at the VIX, be prepared for some more volatility.

Source: CBOE, Reuters, Federal Reserve, CNBC

This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large US bank for more than 20 years.

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